The housing crash we had to have: A Gen Y perspective on the bubble

So bubble mania has finally hit the mainstream. The housing bubble question has landed squarely at the feet of the Prime Minister and his treasurer, and only 10 to 15 years late… What a relief it is then to hear our fearless leaders assure us that there is no bubble, endless house price rises are universally a good thing, and that only poor people try to live in houses they can’t afford.

Yet despite their best efforts, Hockey and Abbott cannot pull the veil back down over the hideous monster that is Australia’s 16 year long housing bubble. That veil has now been permanently lifted. The cat is out of the bag and roaming the remorseless realms of the internet meme, destined to immortalise 2015 as the year Australia woke up to the giant private debt and housing parasite leeching the country of prosperity, equality and egalitarianism. Here I was thinking that I enjoyed a monopoly on being a young person who understood that Australia enjoys the worst land/housing/mortgage bubble in our short history (a history with no less than 5 long forgotten housing bubbles that all ended in tears), and is on a collision course with economic and financial disaster.

But now I find out that I have to share my long held and evidence backed eyes-wide-open perspective on our impending financial and economic doom with other young folk who have correctly identified the real estate emperor’s missing clothes. My inner hipster has been crushed by the knowledge that I am no longer a trend setter in financial and economic literacy, and that my only consolation is being able to say “I knew about the bubble before it was cool”. How disappointing that I no longer retain the deeply scorned moral high ground of knowing better than the vast majority of the country’s Team Australia economists and journalists when it comes to the housing bubble.

Sadly I have to now share that honour with the country’s politicians, economists, journalists, and internet dwelling unwashed masses, most of whom have suddenly discovered that we do indeed have a bubble, after being reminded of such by no less than all four local economic regulators, a financial system inquiry, nearly the whole set of international ratings agencies and investment houses in the world, and a vast army of independent economists and analysts who long ago gave up on this country. For whatever reason the treasury secretary John Fraser was somehow able to point out to stunned audiences that there was indeed an elephant in the room, and that its ready to go on a rampage and trash the joint.

I suppose I should be grateful. Now we can all have a mature discussion about just how screwed we are. Which is where of course whingers like me come in. Belonging to the overseas-holiday-and-smart-phone-addicted, perpetually maligned, short of attention and financially illiterate Generation Y, I thought I’d offer my enlightened dissertation on the monumental balls-up that Australia now finds itself in. Aren’t we sick of being lectured by the existing landed classes, older generations and the real estate, banking, media and political circus that pretends to have half a clue about the largest financial, economic and social risk and injustice of our generation? It may surprise them to know that a lot of Gen Ys understand a lot more than we are taken for, and know a bubble when we see one. We do understand the slightest thing about risk, and are now ready to flip the bird in monumental fashion.

Feigned outrage aside, this is not just another hard-done-by social media rant, copied and pasted into blog form owing to the onerous character limit on Facebook posts. It is a serious condemnation of the current state of affairs with respect to housing in Australia. I hope to offer a rarely sought but valuable and unique perspective from a participant in the landless class/generations, who (as those who know me can attest) has been raging against the insane nature and consequences of the Australian real estate abomination for the last 5 years, alienating friends while railing on like some merchant of doom, only to swear he was on the right side of history. Which for the record I am.

Owing to the seriousness and late stage of Australia’s housing bubble, I no longer acknowledge any debate on the existence of the bubble itself. Like climate change, it is a fact. Time to accept it and mitigate the inevitable fallout. Like any rational and intelligent human being considering the question of anthropogenic climate change, I will only endeavour to engage in debate on the housing bubble definition, causes, scale, implications, consequences, solutions, and overall finger pointing.

If you wish to claim you know better, that’s fine, but don’t tell me about it until you’ve at least read the LF Economics submission to the House of Reps 2015 Inquiry into Home Ownership by Lindsay David and Philip Soos, which contains the full and inglorious detailed empirical evidence on the subjects that I summarise below, and is about 1000 times more informative than any real estate brainwashing and circle-jerk economic cheerleading you’ll get from the mainstream media.

So fair warning, this is an entitled Generation Y whinge to rival all others. A rant for the ages. The magnum opus of a landless youth with no one left to direct anger at that will listen. I promise it will be worth it though, so stick with me, you won’t want to miss the ending to this story.

The bubble facts, reason to panic

Let’s be honest, at the heart of their preposterous responses to the bubble subject this past week, is an attempt by Hockey and Abbott to fend off panic. Yes they have conflicts of interest like most parliamentarians including nice houses and investment properties. Yes they are staggeringly inept. Yes they want to see poor people punished for being poor. Yes they want to keep prices high both for their own interests and the interests of wealthy LNP voters. But it really goes without saying that the most politically damaging outcome for the terrible two would be the collapse of the housing market, with the financial system and economy following shortly afterwards. That is the real truth behind political inaction on affordability. No one wants to own the crash. I’m continually surprised by how few journalists identify that plain fact.

The proof of this fear is in the completely contradictory notion that the government wants prices to keep rising but wants to improve affordability. They must be seen to be doing something about affordability, while trying to defend price rises and pin any prospective price falls on Labor and all those meddling “recession clowns”. With real incomes falling for the last 4 years, and set to fall much further in coming years, achieving both of these aims is of course mutually exclusive. More on that later.

First consider that for Joe and Tony to be so clearly afraid of the bubble bursting, and with the hilarious and beautiful timing of Joe putting his $1.5million ranch up for sale, I argue that there must indeed be a bubble, and it will very soon meet the fate that all bubbles eventually meet by definition, and that is to burst. Joe and Tony have inadvertently called the top of the bubble. But don’t take their word for it. Let’s briefly consider the real evidence, definition, reasons and consequences of the housing bubble, and dispel the associated myths.

The housing bubble is not new, and it’s not unique to Sydney and Melbourne. It’s not 3 years old, or even 10 years old. Australian housing has been in a nation-wide bubble since 1999, when John Howard cut the capital gains tax rate on residential property. Combined with falling interest rates, this set off an orgy of speculative investment, where speculators predictably saw the combination of negative gearing and capital gains tax concessions as the perfect tax shelter and a government sponsored get rich quick scheme.

Economists and journalists like to quibble about whether the last 2-3 years of price action constitutes a bubble. Well there’s only one chart that matters when determining how big this bubble is, and when it started. And it’s truly magnificent:

Since 1999, real house price growth (adjusted for inflation) has massively outstripped real income growth, real rental price growth and real economic growth. It is mathematically and historically impossible for that imbalance to go on forever. It has never happened in recorded human history, because people need to live in houses. If the average person can’t live in the average house there is no economy to speak of, no one to sell houses to, and nothing left to inflate house prices. If every member of Generation Y decided to go on a buyer’s strike tomorrow, the market collapse would be instant and complete.

Structurally low interest rates and liberal lending standards combined with disposable incomes determine the ability of people to borrow money. People naturally pay what they can afford to borrow. As the saying goes, a house is worth what someone will pay for it. More debt = higher prices. Chronically low interest rates do not make housing affordable and prevent a crash, they cause bubbles, which is why the RBA is currently freaking out about the bubble, albeit many years too late.

Private debt is therefore both the cause and the consequence of the housing bubble, and is also what is destroying our once diverse, productive and competitive economic structure, as it crowds out productive investment and lending, and drives up the cost of everything. And of course it’s what causes all the pain when prices finally crash.

The most accurate academic definition of a bubble (from Hyman Minsky) is when investment returns (rent) do not cover the cost of investment (interest), so the investor is completely reliant (speculates) on capital appreciation to profit from the investment. This is the definition of the term speculator with respect to asset markets. The proliferation of negative gearing proves this to be the case in Australia. We have had overall net rental losses since 1999. When you have a market dominated by speculators who have negative cash flow, you have a bubble by definition.

The national housing bubble has gone through minor corrections several times and each time been bailed out by massive cuts to interest rates, first home owner grants, relaxing of foreign investment laws, enabling self managed super funds to borrow to invest in residential real estate, and other fraudulent policies. We aren’t lucky or exceptional, we just geared our whole economic and taxation system to supporting house prices, and did everything to stop a crash. But with the coming economic downturn and smashed government finances, we are now out of ammo baby.

We have almost the least affordable housing in the world compared to every single measure you can compare it to, yet Australia is not exceptional – it is not different here. We just had an extraordinary set of circumstances, and anyone who has studied first year economics understands that specific combinations of circumstances are always cyclical. Like all economies and societies in human history we have boom and bust cycles, and the larger the boom, the larger the bust.

I don’t need to tell you that Australia has just had one of the largest economic booms in its history, comparable to the gold rush, when land values in Melbourne escalated dramatically over many years. But economic booms do not guarantee that bubbles don’t burst. Usually the opposite in fact. In the 1890s (post the gold rush), the land bubble burst, causing the Australian Banking Crisis, and real house prices took 50 years to recover from massive falls. If you were born in that era, you would no doubt have been told by parents, friends, bankers and media that house prices always go down. Imagine that.

Australia has had no less than 5 prior housing bubbles, in the 1890s, 1920s, 1950s, 1970s and 1980s, and none of them ended well. What to speak of the lessons from the GFC. Why are we not lectured on these by the older generations? In every bubble there is the claim that this time it’s different. History proves that once you have a bubble, it’s never different. But we only learn that once it’s too late yet again.

I don’t need to spend any time explaining the exact fallout from a crash. We all know its going to be bad. Can’t we just feel it in our bones?! If you want the gory details, go chat to some friendly folk in Ireland, Spain or the US.

And now to quickly dismiss some of those completely tiresome myths that are repeated ad nauseum by the real estate lobby, bankers and Team Australia economists, the same myths that characterise every bubble in recent history:

There is no genuine lack of physical housing supply. If there was a genuine shortage, rents compared to incomes would also have experienced a similar level of growth as prices. That is not the case. Rental growth is currently at its lowest level in decades. While city rents are expensive, they mostly reflect the enormous wage gains that flowed from the mining boom, and not speculative demand fuelled by cheap debt. Although a serious issue for housing affordability, rents are not a bubble.

Restricted supply of housing leads to steeper price falls when excess demand is removed. When supply is limited, a small increase in demand leads to a large increase in price. But the inverse is also true, where a small decrease in demand (from say, chronic unaffordability, rising interest rates, investor panic, forced sales owing to rising unemployment etc.) will lead to a large fall in prices, just as swiftly as the rises on the way up.

This is exactly what happened in recent bubbles in Ireland, Spain and the US, where everyone insisted for years that there was a massive shortage of supply. Ireland in particular went through a massive surge in construction because of this claim, and suffered much worse price falls because of it. This is exactly what Australia is doing, building into the bust.

Even if we did have responsible lending standards and ultra safe banks, these things do not prevent a bubble from forming or bursting. They did not help Ireland, Spain or the US (or Australia in previous bubbles). All you need for a bubble to form and eventually collapse is cheap debt and the belief that prices will always rise. As discussed earlier, all you need is speculators who require capital gains to earn a profit.

House price speculation is not good for the economy, its actually really bad. It has completely distorted our economy by diverting money and investment away from productive enterprise and business and into unproductive asset price speculation. It has made us uncompetitive, extremely indebted and debt addicted, utterly reliant on export income, un-diversified, and totally pro-cyclical, driving away bellwether value-added economic activity like manufacturing. When the current economic cycle driven by mining and housing fully turns for the worse (which it is already), our economy is toast. We have no resilience or diversity to see us through the hard times. That mythical beast, the “wealth effect” from rising prices, only works when there is more capacity for debt growth and price rises, and supportive economic conditions.

Despite the claims of some short-sighted industry types, the currently falling prices in WA, NT and ACT are not proof that there is no national housing bubble, they are proof that the bubble is very close to the top, and majorly fraying at the seams. Only Sydney and Melbourne have been able to maintain the irrational exuberance at this late stage of the bubble with the help of international money laundering and general speculative insanity – proof that the nation’s housing market is on very shaky ground. Wherever you are in the country, the value of your house is at major risk from the coming correction.

The last myth is my favourite, the one that seeks a scapegoat. There is no single cause for the bubble, nor a single party to blame. There has been an extraordinary swathe of cultural, policy and tax settings to get us to this stage, and nearly all of us bought the line about “this time it’s different” hook line and sinker, just like every other bubble in history. We gave into greed and ignorant exceptionalism, and when this one blows, we will all share the blame and the pain.

A bubble has a way of consuming the hearts and the minds of the country it infects, like a genuine parasite slowly eating its host alive. We have an inability to see things ever being different, until one day the fog clears, the tide goes out, and we see who is left standing with or without pants on. A common fear amongst the younger generations is that they will never own property. This is what I like to refer to as ‘grey sky thinking’, something I heard a property developer of all people once use to explain this psychological phenomenon. There is always a blue sky somewhere, you just forget it exists when you’re stuck in a storm cloud for 20 years.

As I’ve explained, and history shows, it is impossible for such circumstances to continue indefinitely. There is always a cycle at work, no matter how long the cycle. There is only one way out of this for young people, and that is price falls. The time for solutions like tax reform to save us from this fate has passed. We must still pursue these reforms to prevent the next bubble from kicking off down the road, but we cannot prevent the completion of the bubble cycle. All that is needed is patience. No one bothers to explain this whole back story and actually provide real advice to young Australians. All we get is stereotypes, platitudes and false dichotomy. We are constantly let down by people who should know better. People who should have learnt from Australian history and recent global history exactly how dangerous housing bubbles are.

But instead young people are hypnotised by the corrupt and sinister plea to “Buy now or forever miss out”. Ask yourself who it is giving this advice, and who the advice really serves. Apply a little ‘cui bono’ (who benefits) to those real estate industry pimps and pushers.

Its all about risk (and who it belongs to)

A whole generation of leaders and land owners is asking the current generations to accept the poisoned chalice that is Australian real estate. I’ve long said that housing affordability is only the main symptom of the disease, and that the greater injustice is the disease itself, an utterly broken economic model that is wholly reliant on housing speculation, and its sinister ‘comorbidity’ factor: unacceptable financial risk. Unacceptable financial risk is exactly what young Australians are being asked to take off the hands of the landed class, a giant intergenerational transfer of wealth in return for a broken system, just like climate change (apologies, but the analogy is such a good one).

The overwhelming expert consensus is that Australian housing has never been less affordable and more risky. Yet members of Gen X/Y are arrogantly dismissed as spoilt and entitled. Somehow I’m meant to be selfish for rightly pointing out the 20+ years of policy failure (policy rigging) serving the entitlements of existing home owners and speculators, which ruined the productive economy in the process, and for pointing out the terminal risks being thrust upon us. That I’m just an entitled youngster living at home with my folks with inflated expectations, who only cares about how to snag some trendy inner city dive.

This indefensible point of view has been a widespread phenomenon across the Western world in the last decade or so, as those who have benefited from global housing bubbles and rigged financial systems must shoulder at least part of the blame, but instead seek to alleviate guilt by disparaging those on the other side of the fence. Looking at the world post GFC, it’s pretty hard to see how young folks deciding they couldn’t afford a house because they spent too much money on iPhones and didn’t want to live 100km from where they worked, somehow caused the greatest financial meltdown since the great depression. Sorry folks, the answer is private debt and housing bubbles.

The cognitive dissonance of those who defend the status quo is astounding. My publicly professed aspirations as an eventual home owner are meant to somehow preclude me from being critical of economic policy and tax settings that completely ruined our economy, because I’m just entitled. That’s why young folks are finally calling bullshit, and like all bubbles, this one will collapse under the weight of its own hubris and internal contradiction. We’re not selfish, we’re just not financially suicidal. We’re f*ing sensible, and not ready to stand by and take another bolloxing from the powers that be and their indefensible protection of the worst housing bubble in a hundred years.

Young Australians are expected and encouraged – even conned and bribed – into taking on utterly crippling levels of mortgage debt in the assumption that the housing bubble party will continue forever, and that the only way to a secure retirement is to sell your soul for a slice of Aussie real estate. Meanwhile, there is nearly universal acceptance that our housing market is unsustainable in its current form, and a countless list of official warnings from global and local regulators and economic bodies such as the IMF, the OECD, the RBA, ASIC, APRA, international ratings agencies, the Murray Financial System Inquiry, and now arguably our top economic advisor and public servant, the head of the treasury John Fraser. They have all at some time in recent history said we should be very wary of our house prices and the possibility of collapse.

When do the economics editors of the country ever refer to this long list of warnings, and apply it in cautioning young Australians to be extremely careful when considering the risks of entering this current market? How dare these charlatans convince the impressionable younger generations to take on such astronomical risk with barely a mention of these warnings that have repeatedly issued forth from the most experienced and trusted economists in the world. Do Joe Hockey and the tabloid pro-housing spruiker journalists and garden variety real estate agents somehow know better? Are the worlds top economists and analysts just a bunch of doomsayers and clowns? No, they just understand what risk is, unlike the majority of Australians.

Falling prices are coming, and this time they will lead to a self-fulfilling crash

By now it is self evident that house prices must fall to restore affordability. I go further and argue that because of the universal characteristics of a bubble described above, and a backdrop of deteriorating economic conditions and falling incomes, a house price crash is the necessary and inevitable solution to housing affordability.

Given that fact, for young Australians like me, I want to paint a picture of the utterly improbable and devious situation that we are being asked to swallow, by drawing further attention to the contradictory view frequently shared by senior politicians, journalists and writers from an older landed gentry who profess to have a genuine concern for the ability of the next generations to own land at some point in the future, but do not wish to suffer price falls. Or if they begrudgingly admit price falls are needed, the admission is usually coupled with calls for some kind of mitigating policy (such as first home owner grants or allowing access to superannuation for housing deposits or cautioning advice), or counselling caution in reforms in order to ‘avoid distorting the market’, or to ‘avoid a crash’.

In taking this supposedly sensible position, these allegedly well meaning individuals in positions of influence are unavoidably acknowledging the very real threat of a market collapse, and the implications for the economy, financial system, and their own personal assets. But they also feel guilty enough (or possess a conscience enough) to want a solution to housing affordability. They don’t want the market to collapse, but they want young Australians to be able to buy into the market that they know is at risk of collapse…

Think about that for a minute. The notion that making necessary reforms to housing and tax policy might trigger a market downturn and should therefore be offset by some form of stimulus or ‘grandfathering’ of reforms, is a deeply troubling one. If the market is due for a collapse (which it is), it won’t be because of measures to correct the imbalances, it is because of the imbalances themselves.

In other words, most of the economists, journalists, politicians and the landed gentry that they represent, who occasionally advocate for housing reform and solutions to housing affordability, are asking the next generation of Australians to assume all of the risks of the massive imbalances in the housing market, while ensuring that the market is held up long enough for them to pass on that risk. They want us to inherit the enormous risks that they created, holding open the fire escape just long enough to get out before the collapse, which they quietly acknowledge is the most likely eventual outcome.

What a conceited set of leaders and commentators we have. I vainly hope for royal commissions and criminal charges to be laid in some not-so distant future when our livelihoods have been destroyed by the pedlars of Australian real estate who do know better. In Ireland, a country devastated by its own epic real estate bubble with striking similarities to our own, there have been no criminal charges. But there has been an official inquiry. And the results show that the Irish media were complicit and culpable in their unquestioning loyalty to booming real estate and their wilful blindness to the unfailing history of asset/credit bubbles to destroy at least as much wealth as they created on the way up. They were shown to be complicit due to their proven conflict of interest in deriving profits from real estate mania, and no doubt because of a desire to protect their own personal land holdings, and deny any existential threat to their paper wealth.

The long and shameful (and predictable) history of asset bubbles proves that the beneficiaries of the bubble are always victim to a certain exceptionalism, a notion of providence and intelligent decision making that enabled their participation in such windfall gains. The smart investor that got in at the right time. If only there was a way to alleviate the nagging guilt and subconscious fear that eventually there will run out a stock of greater fools to maintain the bubble. Because when there is no stock of greater fools, a self-fulfilling destiny of price collapse follows, as price falls at the margin trigger a rush for the exits by those speculators with negative cash flows who can no longer rely on ever rising prices.

The way to temporarily alleviate this guilt and fear is usually to argue for the economy to catch up to this imbalance between prices and economic fundamentals. The bubble deniers argue that for almost the first time in history, a price bubble will not have to deflate, but that the rest of the world will catch up, justifying the speculative wealth gains achieved by the bubble participants and their exceptional investment choices.

And worse, this exceedingly improbable plan to manage or ‘taper’ the bubble is in direct contradiction to the notion that it is in the interests of those excluded from the bubble to be granted help to participate at this late stage. It is an admission that the bubble cannot go on as it has, but must be preserved in a permanently high plateau to protect speculative wealth gains, and yet sold as a worthwhile risk and investment to the next generation of buyers who will falsely believe that recent price history will repeat itself, but that the long term history of prices matching economic fundamentals – like incomes, rents and economic growth – will not repeat itself. It is disingenuous in the extreme.

This is the cognitive dissonance that our political economy suffers from in huge measure. Everyone with land has a stake in preserving the status quo, even if they do not admit it, and when the vast majority of experts themselves are part of the landed class, we cannot trust their notions of bubble management that masquerade as altruism in assisting people to afford housing at the peak of the bubble. This can only be seen as an offensive disservice to young Australians who don’t know better.

Investment, finance and economics is all about understanding and managing risk, and when we cannot trust anyone to tell the truth about risk, be it media, politicians, family, friends, and certainly not real estate agents, it is the surest sign that we are reaching the zenith of the largest land bubble in Australian history. It should serve as a severe warning to the un-landed masses to avoid at all costs being drawn in to this apogee of risk, just to enable the winners to cash in on their paper wealth, and get out while they can. This is the hot potato that young Australians need to reject at all costs. Let it fail because it must.

For otherwise intelligent and expert commentators and leaders to accept the very real risk of collapse, but to convince the impressionable young to assume that risk is a deeply selfish and contradictory perspective that must be condemned. History will ensure that it is condemned, so for your own sake, don’t fall for the greatest con in living memory. It is inevitable that we will see at least some price falls, and that these price falls will lead to a rush for the exits when there is no longer any policy or monetary levers left to bail out the market. Therefore you have nothing to lose from waiting this out and shunning the housing bubble, and everything to lose from gambling on this sinister and severe level of risk that we will shortly come to understand in all of its emergent horror.

Comments

Rational Radical – Matt Ellis – is a fine young writer and thinker and clearly articulates the views of Gen Y. This is the best educated generation yet and their conclusions cannot be ignored. They believe none of this permanently high plateau stuff. (see also: De-Preston)

Excluded from ownership by price, they will do something else – they have all the advantages of time and energy on their side, and don’t you forget it. When the bubble bursts around them, the unencumbered will have many options, including work overseas during the credit crunch, further study during the high unemployment phase, accumulation into the sharemarket (which cannot ignore a bust housing bubble) or beach-combing. None of these options are there for the negatively geared wanna be rentiers.

The neo-cons should consider carefully whether a nation of renters and devil-take-the-hindmost is a worthy cultural and economic destination. If home ownership makes people conservative voters, then widespread exclusion will likely create a left majority for a generation. Is this really what they want?

Sure house prices in many places in Australia are over valued, but I think young people also need to be careful with their negative attitudes as well. I have heard many young people suggest that house prices are too high and that they can’t afford it and yet, they often take lavish holidays overseas and in many occasions their rent is either equal to a current mortgage repayment and in some cases even more (i.e. buying is cheaper). Property is a long term thing and is a way to force saving. In my opinion, if you can reasonably afford a mortgage and still be able to save, that’s the best way as after a few years, you will build a buffer take will help whether out any change of circumstances that always happen in life. As a rule of thumb, never borrow more than 3 x your household income, so if a couple makes 100K combined, then borrow up to 300K (btw: there are heaps of places in major cities that cost 250K – 350K, but yes in Sydney and Melbourne this is rare). People have to understand that prices are high too because we are in unprecedented times with the cost of money so low and this will obviously push prices up. I’m sure we will have many corrections a long the way and people will lose money, but this has always happened and usually happens to investors, but having said this, this does not affect prices on a grand scale because most people buy within their means and selling a property is not like selling shares, so if prices do fall, people simply don’t sell (if they don’t have too). Some mining towns are losing 80% of their value, in the Gold Coast values dropped around 50% after the GFC, Brisbane lost some 20% after the GFC and subsequent floods and apparently even Sydney top markets dropped some 20% after the GFC. Massive population over leverage is what would cause prices across the board to collapse. We can’t compare Australia with Ireland either as that’s a tiny country and Australia is a continent with different markets everywhere. I’m sure there will be a big correction in Sydney and prices in Struggle street will probably halve, but other more prestigious suburbs won’t have as big a correction. In total, Sydney may experience a 25 correction, but that’s not the end of the world. Perth will probably drop some 20% as well I would imagine. Of course if we have a depression in our economy, then there could be a huge correction higher, but that’s always the case and what ever happens happen. There are so many factors that contribute today’s property prices that we just can’t compare with the 80s or even the 90s. Loans are lot more flexible these days, interest rates are at record lows, immigration, population growth, Super, Shares, Overseas markets, assets, etc. Are we in a global bubble, sure – but there’s no point in worrying too much about it as none of us have any control over anything. Sure it would be good if people could buy houses in Sydney for 50K, but is that going to happen seriously??? Sydney is not New York or London, but in the Australia scheme, Sydney is the largest city and where a lot of people want to live and buy and that’s probably why prices are so high there. When you have foreigners purchasing properties at the top end of the market for cash, that will push up the “median” prices, but that doesn’t mean you can’t find something else elsewhere. My view is that markets will remain volatile and prices will go up and down until monetary policy normalises, but I don’t think anyone know when that will happen… Could be 5 years or 15…. So, just act prudently and buy what you can afford and save for a rainy day… Lastly, what happened in the US (the size of the drop in prices) was mostly due to the HUGE subprime market, where people with no money were buying houses. In Australia, we did have a subprime as well before the GFC, but that was on a much smaller scale. In Spain prices dropped as they did because the British pulled all their money out of the speculative property market. Sure if the Chinese decide to all sell their properties here, we could have the same effect if they end up amounting to a large portion of the market.

What metric did you use to compare Australian sub-prime to US sub-prime Andrew?
You’ve said ours is a lot smaller. How do you know this?

You’re comparing apples and oranges when you talk of ‘young people going on lavish holidays’. You’re noticing that young people today go overseas more than 20 years ago, just like they have bigger TVs than they did 20 years ago. Of course, holdiays and tvs are also a lot cheaper than they used to be. Do you have any evidence at all that young people of today’s generation are spending a greater percentage of their money on travel and entertainment than people were 20 years ago?

You recommend I don’t buy more than 3 times my household income. Well I’m a single dad with a household income of $90,000 per annum and i live in canberra with two kids. There is not a single house for sale in Canberra for $270,000, despite your claims that there is plenty out there in the 250-350k range. I guess earning $90k and way over the median wage makes me too poor to buy a house. Must really suck to actually be poor then.

You tell me i pay so much in rent i could buy. Well do the calculation for me. The house i was last renting I was paying $450/ wk and it was worth around $600,000. Even on today’s record low interest rates that ‘s about $700 week on the mortgage. Plus land rates. Plus maintenance. Plus insurance. Wake up – residential land in capital cities that is positively geared is a thing of the past Andrew.

I’m not negative Andrew. Just another Gen Y sick of peddlers trying to offload a bullshit sandwich.

mmm, so the 15 year bubble can be traced back to the change in CGT policy from an aggregate CPI discount (per Keating) to a flat 50% discount under Costello. Nothing to do with the last 15 years being one of the highest periods of growth in real incomes in Australia, the growth of dual income families and family net income, the trend toward fewer children and having children later in life, the growth in the size and quality of average homes and by the record spending on the renovation and extension of existing homes. The growth in investor participation is definitely “an” influence, but suggesting that it is the “cause” is incredibly simplistic. Also “wherever you are in the country, the value of your house is at major risk from the coming correction” – what about somewhere like Tamworth or Wagga?

Australia has what I call a soufflé economy. It is basically a debt driven ‘rentier’ economy. Once the cycle of cheap debt cycle ends it will deflate rather rapidly. Many of the points you make are merely illusory as unlike Germany which makes things to contribute to GDP we don’t. We count financial transactions as evidence of growth and contributor to GDP which of course it’s not. So while the ‘rentier class’ have been in a circle jerk borrowing debt to buying expensive property of each other (or investment properties) the real productive economy has been hollowed out. A lot of people are in for a nasty surprise – other soufflé economies are Canada, the US and UK.

FF, I’m just quoting from the article “Australian housing has been in a nation-wide bubble since 1999, when John Howard cut the capital gains tax rate on residential property. Combined with falling interest rates, this set off an orgy of speculative investment”

How then do you explain over-heated markets like Auckland and Vancouver – did Costello set their tax policy as well?

Why is Alice Springs expensive? Um, because to build a house there costs twice as much as on the east coast. And if Malibu is cheaper, remember your owner occupier mortgage is tax deductible in the USA so wouldn’t that create some doubt in your mind that tax policy isn’t the major (or “only”) influence on prices?

Your other comment, “what’s cause and what’s affect?”; but that is my exact point – do you know for sure?

@FF, the comment in the article is about the impetus introduced by the Costello change to CGT. Capital gains on investment properties in NZ are fully taxable at marginal tax rates if the IRD deems the investment to have been speculative. There is full capital gains tax in Canada and owner occupier mortgages are tax deductible AND CGT exempt, as is the case in the USA. I maintain my point, tax is an influence but there is little evidence to suggest it is the major influence, let alone the “only” influence.

Size? Have a look at a 4-5 bed home and a 3 bedder and see if the difference equates to the extra material/time.
“the growth of dual income families and family net income,” So you earn more money thus the price of housing should automatically raise?
Dual income? With present household budgets stretched as they are with mortgage debt multiples of what it was in the 80s the av hh has twice the exposure to wage lose.
Regional housing at risk? Why not? Check out Alice Springshttp://www.realestate.com.au/buy/in-alice+springs+-+greater+region,+nt/list-1
In the middle of the desert with places selling for 1/2 a mil. What could be wrong with that!

Nothing to do with the last 15 years being one of the highest periods of growth in real incomes in Australia, the growth of dual income families and family net income, […]

Well, I guess that also explains why TVs, computers and cars have also gotten so expensive…

[…] the trend toward fewer children and having children later in life, […]

You have your cause and effect arse-about-face.

[…] the growth in the size and quality of average homes and by the record spending on the renovation and extension of existing homes.

The bubble is in the land component. Building is cheap (well, no more expensive than it was in the past). The 4th bedroom and rumpus in a half million dollar house+land package is probably less than 10% of the total cost.

Also “wherever you are in the country, the value of your house is at major risk from the coming correction” – what about somewhere like Tamworth or Wagga?

@FF; “Well, I guess that also explains why TVs, computers and cars have also gotten so expensive…”

Good point – that helps explains why people have more disposable income for housing and is yet another reason why bare comparisons of single wage to house price multiples from the 1970s and 80s are bogus.

“You have your cause and effect arse-about-face”.

How so? Your view is that people are deferring having children because of high property prices – you don’t think there has been a social trend toward increased female workforce participation and women focusing on getting their careers established that has helped put pressure on prices?

“The bubble is in the land component. Building is cheap (well, no more expensive than it was in the past). The 4th bedroom in a half million dollar house+land package is probably less than 10% of the total cost.”

Yes, but that’s a capital city perspective. In regional areas, building costs make up the larger component of total cost.

Alice Springs is a convenient outlier; try closer to home. Bathurst, 50% more population than Alice, 2.5 hrs from Sydney and median house price $325K. Prices have barely kept place with inflation over the last ten years. Why isn’t NG doing it’s thing here?
” So you earn more money thus the price of housing should automatically raise?” Unfortunately, yes. That’s simple supply and demand. If demand rises faster than supply (demand will increase if real incomes increase) prices must rise.

stitches,
325k in Bathurst, huh? What’s it cost to build a house, 200k? Land 150k? Either the build cost is too high or the land cost. Bathurst is the middle of nowhere, availability of cheap land shouldn’t be an issue.

@ Stitches….so in short you believe that prices are not over-inflated and are underpinned by fundamentals. The move to dual income households is valid insomuch as household income has undergone a permanent step-change. But if you look at the first graph in the article, that is effectively covered BEFORE the bubble began in 1999, with real prices basically doubling in the period 1960-1990. The skyrocketing ratio of HOUSEHOLD income to house prices since 1999 blows your point out of the water. All your other points are real estate spruik and bluster. Housing quality…LOL. Yeah, that plunge pool in Minto is worth every cent. Take a drive around any capital city suburb and there are a lot of polished turds. Renovated yes, quality no. And how do you explain unrenovated homes fetching equally ludicrous prices? As I said, spruik and bluster.

Good point – that helps explains why people have more disposable income for housing and is yet another reason why bare comparisons of single wage to house price multiples from the 1970s and 80s are bogus.

I was hoping you could explain why the large growth in real income has not made big TVs and cars more expensive, like you are arguing it has to houses.

How so? Your view is that people are deferring having children because of high property prices – you don’t think there has been a social trend toward increased female workforce participation and women focusing on getting their careers established that has helped put pressure on prices?

There was such a trend, and it was pretty much done and dusted by the mid-90s (if not the ’80s).

Note also that male participation has had a slow but steady downward trend over the last 30-40 years.

Yes, but that’s a capital city perspective. In regional areas, building costs make up the larger component of total cost.

That doesn’t change the fact that the bubble is in the land component. The cheapest block of land I saw in a quick search in Wagga was a HUNDRED GRAND. In fucking Wagga !

Not sure why you quoted this; are these bubble prices?

To highlight how unaffordable even regional areas are.

Further, according to the definition above it is, yes they are bubble prices. The median rent for a house in Wagga is $328/wk, which will not cover the interest component of a $360,000 loan at 5% (which is being very generous). Interestingly, the unit price does just scrape in (median rent $250 vs $245 interest component on a $255k loan), but then you need to consider the record low interest rates of today.

The fundamental point here is that property in Wagga is very, very expensive in context, which supports the argument that it’s a nation-wide problem.

How far do you think they are going to drop when it costs at least $200K to build a basic new house?

Land in somewhere like Wagga should be nearly free – not a HUNDRED FUCKING GRAND for a 1000m^2 block.

As for construction costs, this says that a basic 3 bedroom house should cost about $1100/m^2 to build. So a 120m^2 house should be in the ballpark of $130k to build.

As for how far it will drop, when the high property prices underpinning everything making this country so outrageously expensive to live drop, costs for everything else – like construction – are going to drop as well.

@moderate mouses. “in short you believe that prices are not over-inflated and are underpinned by fundamentals”. No, I believe that what we have is a range of fundamental AND irrational influences that are over-inflating prices. I can’t accept some of the one-dimensional, simplistic arguments being put forward to explain something so complex and I also don’t accept that the recent “bubble” is a national event. That doesn’t make me a spruiker – I don’t own an investment property.

@DrSmithy “Land in somewhere like Wagga should be nearly free – not a HUNDRED FUCKING GRAND for a 1000m^2 block” – A block of land in Wagga for the price of a Landrover Discovery doesn’t sound like a bubble to me, or to most people. I wish you luck with getting a house built on a block with services connected and ready to go for $130K (the size you have quoted is a mid sized apartment btw)

A block of land in Wagga for the price of a Landrover Discovery doesn’t sound like a bubble to me, or to most people.

Nothing would, so that’s hardly surprising.

Supply of land around Wagga is, for all practical purposes, infinite. It should be nearly free.

I wish you luck with getting a house built on a block with services connected and ready to go for $130K (the size you have quoted is a mid sized apartment btw)

120m^2 a “mid-sized apartment” ? You’re off with the fairies. It’s a typical 3-bed size, and relatively few apartments are 3-bedders. For a “basic new house”, if it were only two bedrooms, it would be quite sufficient. Shit, the 4-bed house I’m living in now is less than 150, and that includes the garage.

@FF “I was hoping you could explain why the large growth in real income has not made big TVs and cars more expensive, like you are arguing it has to houses” Pretty simple a) supply of these products is unlimited whereas land isn’t b) The shift to production of electronic items in China c) Improved technology which has lowered the cost of production globally d) Improvement in global wealth and population, creating more demand and therefore improved scale for manufacturers e) Reduction of tariffs on imported cars. Cars and major household items were significantly more expensive in the 1960s to mid 1980s, as were clothes and food. Any analysis of real disposable income for housing should take changes like these in to account rather than accepting a simplistic pre tax income multiple at face value.

@ DrSmithy “120m^2 a “mid-sized apartment” ? You’re off with the fairies. It’s a typical 3-bed size, and relatively few apartments are 3-bedders. For a “basic new house”, if it were only two bedrooms, it would be quite sufficient. Shit, the 4-bed house I’m living in now is less than 150, and that includes the garage”
The average Australian house is one of the largest in the world at over 200sqm http://reneweconomy.com.au/2013/how-big-is-a-house-average-house-size-by-country-78685
120 sqm is a very small new house, in fact you would struggle to find a project home builder offering a product of that size in a freestanding house.

Pretty simple a) supply of these products is unlimited whereas land isn’t b) The shift to production of electronic items in China c) Improved technology which has lowered the cost of production globally d) Improvement in global wealth and population, creating more demand and therefore improved scale for manufacturers e) Reduction of tariffs on imported cars.

These arguments are not even vaguely convincing.

The supply of land in Australia is, for all practical purposes, infinite. If every household in Australia got a 1/4 acre, you’d barely have the equivalent of 1/8th of Tasmania.

Construction costs have not increased in real terms, and if anything have decreased slightly.

The bubble is entirely in the – effectively infinitely supplied – land component.

The average Australian house is one of the largest in the world at over 200sqm […]

I’ll assume from yet another cheap attempt to change the subject you agree with me.

As always coolnik, you completely misunderstand my position which can be summed up as:

Be careful what you wish for.

I don’t disagree with much in the piece. The crash may well be unavoidable, and a ‘slow melt’ or taper scenario is increasingly improbable, that doesn’t mean we shouldn’t try. The idea that we should deliberately engineer a housing crash by hiking rates before we’ve tried tax reform, macroprudential, and enforcing foreign investment rules is sheer bloody madness. You think the upside of the housing bubble is painful, its nothing compared to the downside!

As for Gen Y being lured into the bubble that clearly isn’t true in recent times. Gen Y hasn’t been participating because they can’t. Its just way too expensive. The boomers have been speculating against themselves and the foreign investors, and they will be the biggest losers from any correction, and deservedly so. But Gen Y will suffer indirectly as the economy goes into a tailspin and unemployment rockets. Don’t believe me? Check out the unemployment numbers in Ireland or Spain since the GFC.

In short a crash is probably inevitable, but lets not bring it on deliberately by hiking rates, juicing the AUD, and whacking what’s left of trade-exposed sector. If housing does crash we are really going to need viable export businesses to support employment.

Delaying the crash is complete madness when you already have one of the most moronic housing bubbles in history.

Taleb Nassim’s thought provoking book “Anti-Fragile” details the folly of economists and central banks trying to engineer out the booms and busts of economic systems and how this leads to a brittle, fragile and non productive economy (sound familar?). Extremes make an economy more robust and anti-fragile. Letting the market clear out built up corruption and non productive sectors (i.e. financial sector) actually provides the territory for a new growth cycle.

I recommend you read Jim Grant’s book “The Forgotten Depression: 1921: The Crash That Cured Itself” to see how effective Mr. Market can be when left to do what he does best.

In 1920 in the US there was a financial crisis that was actually more severe than the Great depression. Top to bottom, spring 1920 to summer 1921, nominal GDP fell by 23.9%, wholesale prices by 40.8% and the CPI by 8.3%. Unemployment, as it was inexactly measured, topped out at about 14% from a pre-bust low of as little as 2%.

How did the fledgling FED face this big slump? It tightened, pushing up short rates in mid-depression to as high as 8.13% from a business cycle peak of 6%. As Jim Grant puts it “… then something wonderful happened: Markets cleared, and a vibrant recovery began. There were plenty of bankruptcies and no few brickbats launched in the direction of the governor of the New York Fed, Benjamin Strong, for the deflation that cut an especially wide and devastating swath through the American farm economy. But in 1922, the first full year of recovery, the Fed’s index of industrial production leapt by 27.3%. By 1923, the unemployment rate was back to 3.2%. The 1920s began to roar.”

Three years ago I would have wholeheartedly agreed, and you guys are probably right about being careful what you wish for, but we’ve had almost a decade to get our house (pardon the pun) in order. We saw what happened around the world with house prices and the folly of relying on too much person debt, speculation and consumption. We also know from history that mining booms don’t generally end well. Yet we arrogantly ploughed forward as if the lessons of the past simply don’t apply to us.. At this point I don’t know what the least damaging option is. Certainly I don’t think the country can afford another decade of this insanity.

Check out the ‘success’ of Japan manufacturing a 30 year ‘soft landing’.

Australia is in the situation it is now because of everyone being too scared to accept reality. This has bred the sheer arrogance of the idiots I have to deal with at dinner parties telling me there is no risk in borrowing extreme amounts of money – because “people have been saying it would fall for years and it hasn’t”. The same people believe strongly that “Australia is different”.

Ignorance and arrogance – with a dash of extreme leverage – what a mix…

Agree with the sentiment of a soft landing, but the problem as always are unintended consequences. By way of example consider trying to frame public policy somewhere between letting the financial parasites take a bath and saving the family home. The former group would be better informed than the latter so have the ability to minimise or even avoid the pain.
I can’t imagine an equitable solution. This is where the brains trust find themselves now the horse has well and truly bolted. Policy paralysis.

Lorax – How do you expect to get a “slow melt” when you keep cranking the thermostat closer to zero. Aint no surprise that we are not seeing any melting in Oz – even with Abbott pumping out the green houses gases.

If you want a slow melt the way to do it is simple.

1. Direct APRA to direct the banks to wind down their use of offshore borrowing for mortgage ops. That will put gentle upward pressure on mortgage rates with no change to the RBA target rate.

2. Support demand by increasing the tax free threshold and funding critical infrastructure for housing and logistics.

3. Pay for No. 2 by issuing interest free non transferrable bonds to the RBA in exchange for some Treasury ES account entries.

Job done.

slow melt house prices
lower exchange rate (as a major source of unproductive capital is reduced)
more demand in the economy
people have capacity to pay down their debts
no new interest bearing debt

Care must be taken to avoid too much inflation but that is the easiest bit.

DE, I would like to offer an idea for content. Now that the bubble is acknowledged can MB start debate on bank resolution for the bust. This will
Be a banking crisis of epic proportions , we need to start talking about solutions now .
I favour an Iceland solution. Let them all go bust protect depositors and barbecue equity/pref Equity and junior bond Sub Debt holders . With Jail time for bankers.

I fear we will get a TARP put down our throats during the panic with bonuses for criminals and government providing equity no questions asked.

Studies have shown bank crisis cost around10% of GDP, $160B for Oz but could be higher with all the little credit unions that will die an take down the small towns/regions that depend on them .

Let’s start the debate now . If anyone is a expert on Social Media a face book page maybe I will donate to the cause $500 to start anyone with me ?

As a Gen X myself, I agree. Many of my cohort will be in the trading up (ie. doubling down) phase right about now. The lucky ones will hold on to their nice homes, while spending the remaining years of their career trying to fill a massive financial hole.

Nice write up.
However, just a reminder, its not just Gen Ys who sees/feels the same way.
Also, housing (with land and leafy gardens) in premium areas like within 7km radius of the city (Example. In Melbourne, places like Richmond, Hawthorn, Brighton. Kew etc) will always be expensive bubble or not, since that’s where the rich resides since forever.
But 2 bedroom or studio-type shoe boxes will go down in value, since those are what attracts the investors and speculators. Fringe suburbs should also reduce to the more “reasonable” price range, Zone 1 areas will reduce from “excessively unaffordable” to “expensive”.

I think the kicker for the top end will be the demise of quick millionaires from the likes of the mining boom, who needed to “show” themselves by buying big in riverside suburbs (perth) and paying well over the top.

Those leafy areas are where the massive mortgages are. People borrowing $1m because they feel they have no choice, they grew up in Brighton so have to buy there. When the $200k job at the mid tier law firm disappears the will be out on their ass same as the former car worker in Altona .

When I mentioned “leafy” suburbs in the inner East Melbourne… I’m specifically speaking about the houses where the owners lives there since the 80s.
The “young” couples who choose to take out million dollar mortgages to move in there in the last 5 years are INDEED in trouble. But I have friends who have “hand me downs” from their parents who are retired and travelling the world. I also have senior management who still lives there since the 80s and do not plan to move since those areas have everything.

But I also am aware of young yuppies moving in there who earn good money but are on huge mortgages… if I was one of those people, I’d put my house on auction now to see if I can sell it at a nice profit whilst the iron is hot.

Excellent article. One thing caught my attention and it’s this:“If every member of Generation Y decided to go on a buyer’s strike tomorrow, the market collapse would be instant and complete.”
That’s exactly what every member of generation Y should do. If somehow gen Y can self organize (and believe me this is in their own self interest) and decide to boycott all auctions and house buying, this thing will collapse under its own weight.

Yes, but doesn’t that contradict the assertion that it is investors who are responsible for The Bubble? If that was correct, whether a bunch of starving, disgruntled Gen Y’s turned up at an auction or not would make no difference…

Worth exploring a bit more the merits and the mechanics of a successful boycott:

What Makes A Boycott Work?
But not all boycotts are successful. Brayden King is a professor of management and organizations at Northwestern University. In 2008, King published research on why some boycotts succeed and others fail. He says the most critical factors are corporate vulnerability and reputations. From the Kellogg School of Management:
King examined boycotts against elite, publicly traded corporations reported in five geographically distributed national American newspapers between 1990 and 2005. He then set out to discover why 53 of the 144 firms in the sample conceded to the boycotters’ demands.
His findings confirm his hypothesis with respect to the importance of the media, but with a surprising twist. As predicted, boycotts are indeed more likely to exert influence when they receive a great deal of media attention. Interestingly though, his results indicate that even with media coverage, previous sales declines have statistically insignificant bearing on whether a boycott will ultimately bear fruit for activists. Instead, the real power of a boycott lies in its ability to inflict damage to corporate reputation. King observes that corporations that struggle with their public image are more likely to take boycott demands seriously, whereas corporations with strong reputations feel more impervious to such demands and are more likely to “stick to their guns” regardless of sales levels.
source: http://newsone.com/2964648/some-boycotts-are-effective-but-not-for-the-reason-you-think/

Mate, I’m a brickie, like my flash ute?
V8 and jet black it’s real fucken beaut
I’m 26, three IPs and a house
Investing’s a doddle it’s just bloody grouse
Bought a new joint right off the plan
Saved on stamp duty I am so the man!
It’s interest only, yeah lock that right in
Leverage up go harder to win
Equity mate! Growth’s what you use
Forget about yields, that’s why you lose
The property game it’s money for jam
Five percent down, I’m rich, yes I am

Told my boss I was quitting to do my own thing
Hell, it’s so easy, put a few renos in
Just six months later I’ve bought myself nine
But my fixerups aren’t quite running on time
Bloody damn tradies those cunts are so lazy
Turn up on schedule? Are you fucken crazy?
My costs they are jumping but no need to worry
House prices are rising in a hell of a hurry
The bank, they just called, want a meeting next week
I’m borrowing more, I’ll own half the damn street!
My banker and me we’re real best of chums
I let him handle all those tiresome sums
He does the numbers, I take him out drinking
Then to a strip show to see something winking
Last time around he approved my 9th flat
Relationship management, easy as that

I got a twin brother, he’s got two degrees
Still paying off HECS he lives on his knees
Been telling me “bro, it’s a ridiculous bubble”
Dopey dumb cunt there’s no bloody trouble
To prove I was smarter and show him who’s right
We zipped off to Bali late that same night
Used up my offset, drew my cash down
And just like a flash we was clean outta town
Flew there on business, fuck me its great
Shagged Suzie the hostie, he shagged her best mate

Soon as we’re back I head down to the bank
My manager mate he starts talking frank
He reckons this market’s on a crazy old tear
It can’t really last far into next year
Investors gone mental, pumping in super
Leveraging up, a big feedback looper
Incomes and rents they can’t keep the pace
Banks way exposed big risk to the base
The old fundamentals they’re shot all to hell
He told me right then it won’t end so well
The bubble is growing, no doubt will get bigger
But oh when it pops what a grave it’ll dig ya
Buying in now, that’s a fool’s silly gambit
Paying king’s ransom for a shitty wee hamlet
The yield’s are pathetic the gains they aren’t there
Recession is coming it’s buyer beware!
There’s so many folks with a ginormous mortgage
They lose their job… well it’s financial carnage
A full recourse loan, there’s no great escape
You’ll stay a bank slave, suffer digital rape
We sequester your income, leave you on a drip
We’ve got your ticket, we’ll keep taking clips
With so many owners desperate to quit
To lowballing offers they’ll quickly submit
As prices start tumbling then heavily crashing
Owning IPs will go right out of fashion
The lines on the chart they have to converge
Back to historical levels where the medians merge
Prices to income, prices to rent
It’s all going back to be where they’re meant

I’m confused for a moment cos this can’t go wrong
I’m riding a winner that’s running real strong
Houses we all know only upwards they go
No way imagined I’d do any dough
The loans are all solid, I ain’t going down
What do they know these suit-wearing clowns?
The recipe’s perfect, geared up tax breaks
Invest into property, that’s wealth ya can’t fake
I knew that my prospects were brighter than bright
Then the cunt dropped me smack deep in the shite

Your LVR mate, it’s right out of whack
You desperately need to drag it right back
You’re way over the edge, you’re past 99
If it was 80 well then you’d be fine
No worries, I tell him, the market’s real strong
I’ll flick off one IP that won’t take me long
He looked at me funny, said I’m “over risked”
We want back our money and we want it brisk
But mate! Its all sorted, I got it sussed
And that’s when that asshole pushed me under the bus
Your numbers don’t add up you’re selling them all
You’re leveraged to hell and set for a fall
We ain’t going down cos you can’t add up
I’m telling you straight, this ain’t no windup
Get me five million you got 30 days
Five million?! You’re joking?! There’s no fucken way!!

It’s over red rover, it’s cash flow you lack
You’ve blown out the budget, you’re swimming in crap
Negative geared, just three tenants who pay thee
(And fixing nine Renos, all currently empty)
Was 5 percent down now your equity’s shot
Pay up on the knocker or we take back the lot
We’ll sell in possession, we’ll get what we can
There’ll be nothing left over for you tradie man
Any mortgagee losses we incur on the way
Lucky for us your insurance defrays
And oh, by the way, we’ll grab back your ute
That loan’s 30k and a bit more to boot

I turned kind of pale, my Bali tan faded
I blurted out loud, “but I thought I had made it”
It was blindingly clear that it wasn’t my fault
Those fucken cunt bankers forcing needless defaults
Took all of my money, I’m bankrupt, I’m broke
Parasite wankers, preyin’ on tradie folk
Called my old boss to get my job back
But he isn’t hiring, says construction’s gone flat
So I’m living with mum, I’ve gone on the dole
Now all I can pull is some ugly fat moll

And so ends the story of a tradie who knew
Fuck all (or less) as to why he went through
Hubris and greed are not a great mix
When all one is good at is
stacking
up
bricks

Reminded me of a bloke talking to me while we were watching the cricket World Cup taking calls and sending various chummy voice mails with his ‘banker in Australia’ who was ‘sorting him out with some more money’ – saying he was a ‘top bloke’, ‘always on the piss’ and ‘great at getting things through’.

To steal from TISM: “I might have gone to Uni, but at least I know I’m dumb”

thinking of making it into a short film, though done as a music video would be great. Just needs some crowd funding…cos sure as shit the bank won’t lend me any as I don’t have a house to use as equity. Irony squared.

MD-That glows and hisses like my acetylene torch cutting boiler plate. Tremendous to read and feel the soul behind it all. Marvellous!
Develop it, build on it. Get it ‘out there’ where it can be heard and shared. A rap with a cogent message nowadays gets attention.

FWIW, I mentally adding this after stanzas 2,4,6,8&9
“Just gonna stand there and watch me burn
But that’s alright because I like the way it hurts
Just gonna stand there and hear me cry
But that’s alright because I love the way you lie
I love the way you lie”
MNM / Rhi

@ david Collyer: I agree the more we get the message that “this was engineered by the vested interest” into mainstream consciousness the more we smash the ability for them to use “whocouldanode” when the inevitable happens. We need an aware public that holds those responsible to account rather than a scared and confused one giving them a panic/crisis which they will use to push agendas and profit further.

We need to be ready and waiting to demand an Iceland solution when the SHTF, backstop the depositors and let the banks and specufestors burn.

Someone set up a crowd source page on this project, the bubble machines at every auction flash mobs and any other project which gets this into the agenda before the crash.

Thanks for the heads up Bedugl. Appears from his other posts on Hot Copper it appears Ajinomoto Lazy little bastards are finally putting those BA degrees to work too, a bit of poetry. Probably written on one their overseas holidays. a typical, a self-centred twat who thinks he’s funny while lacking creativity himself. All hat and no cattle as the Texans say. Not to mention being a rip off artist and specufestor.
I signed up and tried to post a rebuttal to this knobhead who nicked it and then attached his silly little bitch whine, but keep getting an error message on Hot Copper saying I can’t post.
I don’t have an arts degree, a Bachelors in Commerce (when they meant something) and a Masters in Entrepreneurship and Innovation. I’ve started high tech firms, raised millions in capital and advised Boards of publicly listed companies on corporate strategy. What I thought was thoroughly amusing was how many on the site gave my tone poem the thumbs up. The muppet doesn’t know his audience, he’s too busy preening himself in the mirror…

Appears from his other posts on Hot Copper that Ajinomoto is a typical self-centred twat who thinks he’s funny when in truth he lacks any creativity. I’d say a jealous Type A given his inane commentary:

“Lazy little bastards are finally putting those BA degrees to work too, a bit of poetry. Probably written on one their overseas holidays.”

A right genius is Ajinomoto… All hat and no cattle as the Texans say. Not to mention being a rip off artist and specufestor.

I signed up and tried to post a rebuttal to this knobhead who nicked it and then attached his silly little bitch whine, but keep getting an error message on Hot Copper saying I can’t post. Probably not a bad thing, will save me wasting oxygen on a selfish muppet.

And since you’ll probably read this Ajinomoto, I don’t have an arts degree, a Bachelors in Commerce (when they meant something) and a Masters in Entrepreneurship and Innovation. I’ve started high tech firms, raised millions in capital and advised Boards of publicly listed companies on corporate strategy.

Don’t bother engaging in a real debate Ajinomoto (or whatever you call yourself on MacroBusiness (God or ResearchTime perhaps), you’re too busy preening yourself in the mirror pretending you’re one of the beautiful people…when in reality all you are is a lucky bastard in the lucky country who happened to luck in on the timing. That didn’t take brains or skill to create wealth, just time and the fortuitous happenstance of being and buying in the right point in history when housing was a place to live, not a speculation supported by a tax rort. Well done big shot, you’re an inspiration to us all.

Time for an apology to Ajinomoto at Hot Copper who posted my piece there (and slagged it off). Turns out he was being sarcastic – like Reusa – and he apologised for not properly attributing the work. And complimented me on my creative name calling. All good now.

This isn’t policy failure for neo-libs, this outcome represents the core of their beliefs. Not everyone is supposed to be a winner, and we’re not responsible for equalising outcomes. We’ll give you some basic tools to access opportunity, hopefully you have some existing resources to work out how to put them together. The rest is up to you.

Hockey’s lapse of honesty the other day to “get a better job” goes to the heart of neo-liberal ideology. That is indeed at the core of their policy approach. Our history of homeownership is seen by this new breed of neo-libs as an anomoly. It doesn’t matter to them that not everyone will grow up being able to buy a house. But guess what – you can always have that as your goal, and it’s up to you to put the hard work in and make it so.

Neo-libs aren’t here to give you a hand out, nor are they interested in saving you from the pressures of Globalisation. They want you to compete. This is the system they have designed as an expression of their core beliefs. They don’t care if its the Chinese or Russians or Brits or South Africans or Japanese or Martians whose capital flows are pushing up house prices in your own country. That’s called freedom of capital movement, and those who have that capital are entitled to invest it where they see fit. If you have been out-bid, then that is only your fault, and your obligation to redress by working harder, being more competitive.

As long as you have somewhere to live, the market is functioning. You are not entitled to own a house. You are not entitled to expect the city you live in to provide affordable accommodation in that exact part of the city you desire to live in. You are not entitled to expect 80sqm of space where others make do with 40sqm. You are not entitled to 40sqm where others make do with 20sqm. You’re not entitled to expect that your local state school on the city fringes will give your kids the same opportunity as those in the wealthier core. You can live where ever and in which ever circumstances can be funded by your own effort.

That is the entitlement mentality Hockey was referring to in London those few years back. No-one is entitled to expect anything other than what they can provide for themselves. Neo-libs do not like the remnants of what they regard to be socialist policy. They have been working apace for three decades to break them down. Home ownership rates have a long, long way to fall from here.

Government is not going to stand in the way of freely moving capital, and that capital is going to determine prices. And by God, that global Capital is going to demand and enforce policies that preserve its value. It is going to buy the political system. Despite the platitudes its political stooges are obliged to offer up to placate voters, it is not going to cede.

Never mind the inconsistency and hypocrisy and unintended consequences. This is the world neo-liberalism has wrought. It is not going to go quietly into the night. And in an interconected globalised system with freedom of capital, there is no true local power without global collectivism.

This isn’t a bubble. This is the step up to an everything-old-is-new-again ideological paradigm. I”m not saying nominally socialist countries are immune, particuarly given they still remain exposed to the same global dynamics. But those European socialist countries you list also target equalisation of income and social outcomes. And indeed, Gen Y and anyone else is entitled to say “Fcuk that”. Just as long as they don’t expect it will make a grain of difference against this neolib belief system. It won’t. It all comes back to what people in power believe. What is the value system driving this ? This isn’t policy failure. It is the desired outcome.

If the people in power exerting influence over this economic system generally and housing market specifically are not operating in accordance with their value system, then I don’t know what you imagine is driving them. They are certainly not acting in ignorance. They know perfectly well that the taxation system is favoring capital over labour, that it is perpetuating higher asset prices. That is their desired outcome. A correction in prices will represent an adjustment at the margins. That structural policy shift that has taken place since the 70s and gained a head full of steam in the late 90s, is not going to be corrected by any neolib torch bearer.

“It’s an oversimplification to call Sweden “socialist”. While it’s true that Sweden has been ruled by the Social Democratic Party (“socialdemokraterna”) for most of the 20th century, and without interruption from 1932 to 1976, there are several reasons which suggest Sweden is not socialist:

Sweden has had a strong free trade-orientation since the 19th century. The Swedish economy is small, specialized, open and dependent on exports, which has helped generated money for a generous welfare state.

Connected to this: Sweden has become very business-friendly. Entrepreneurship is openly encouraged in every possible way, which is why such a small country has spawned Skype, Spotify, Minecraft…
Sweden’s defense relies on NATO. Sweden isn’t a member of NATO formally but that doesn’t change the fact that Sweden depends upon the United States for its security. In an EU context, Sweden is very vocal in its criticisms against human rights violations in states such as Russia and China, compared to countries such as Italy or eastern European states.

In other respects, though, Sweden can be considered more “socialist” than other European countries.

For instance:

Redistribution and focus on social issues has made the Swedish society one of the most “equal” in the world. Gender equality, income equality, equality in the workplace…you name it. This is a point of pride for most Swedes.

During the Cold War the Social Democratic Party developed the concept @Folkhemmet , a kind of utopian vision of a middle way between capitalism and socialism. Through gradual reforms the aim was to eliminate income differences, encouraging collectivism and collaboration across social classes to advance the national interest. As a result, Swedes have a very strong attachment to the State, and less so to the family or their local community.

Other “leftist” ideas are important in Sweden, above all feminism and environmentalism. This is true even for parties on the “right” side of the political spectrum in Sweden.

…Government is not going to stand in the way of freely moving capital, and that capital is going to determine prices. And by God, that global Capital is going to demand and enforce policies that preserve its value. It is going to buy the political system….”
+1! I believe that’s the centre of it all. MB is celebrating too early…

I think the thing that nobody is quite getting yet (or stating) is that it is the economy which is fucked by the housing bubble, and the economy will never be fixed again without the housing market correcting (maybe short another mining boom).

All the policy tweaking in the world isnt worth a nob of nanny goat shite if the working Australians are going to have to pour every last cent they earn into putting a roof over their heads. No amount of labour reform is going to improve productivity, competitiveness or quality of life for Australians (particularly those working and paying taxes to sustain the budget) if those same Australians are simply prey for a mortgage/specufestor succubus. No major global employers are going to think that Australia is a place to implement projects if the land on which they would carry out the projects and the peoples whom they would do them with are amongst the most expensive on the planet.

All the financial system inquiries in the world are essentially meaningless if our financial system is only about funding asset bubbles from offshore borrowings as we sell of national assets.

All the tax reform in the world is pointless if the government does nothing about a tax framework which has tax avoidance as the key wealth generation process for the asset owning section of Australian society.

This is the core of the bubble. Not the entitlement of future and younger Australians (an entitlement I completely agree with) to have an affordable house. We could be the greatest pack of turds of all time towards our own children and the bubble still wouldnt make sense – we would still have a nation which wasnt a going concern.

The answer is to get all Australians working for Australia’s future, to identify what a plausible niche in that future will be and then set about investing in and encouraging investment in that future and then working at it – the housing bubble distorts the investing and the working. But the start of the bringing together of all Australians to commence working towards that future must come to house prices. It is time to start.

However, I dont think the neo-libs really expected the average Australian investor to dare risk it and exploit the negative gearing policy. It’s meant to be for the upper echelons to exploit, but you have Tom, Dick and Harry jumping in, its spreading too fast to too many people as shown by the investor loans on interest only mortgages… thats not good even for EVERYONE.

French philosophy re Australian housing:
Descartes: I think, therefore I am, not, buying in Sydney.
Marceau: I live, in a box, therefore I am, in a Melbourne apartment.
D’renters: I think, therefore I rent.
Dumass: I don’t think, therefore I am, invested in Australian RE.
De’revestor: I am entitled, therefore IP negatively.
De’houso: I rent, therefore I am not.
Pascal: I am negatively geared, therefore I am, working on being, positively broke.

And Descartes as a teen (an early work, pre enlightment): I stink, therefore I am.

If you agree with this premise, you should remove as much capital as possible from Australia & its banking system. As the ‘Neo’s’ continually remined us ‘capital is mobile’; repatriate it (intact) when the bubble has bust & the dust has settled.

What I find fascinating is that up until 2 months ago affordable housing was never talked about in main stream media. In Parliament, it was taboo. All of a sudden, it’s all over the news everywhere and even made it into Parliament debates. We certainly reached a tipping point as far as the issue becoming mainstream. I’m no fan of Malcolm Gladwell (tipping point theory), but would be interesting to try to identify the factors that pushed us over the fence.
Next, we need a tipping point for the climate debate.

Agreed, I was just saying to the good woman that we are in phase 1 of things, and that is mainstream media and the country acknowledging we have a bubble, phase 2 is the discussion about what happens when the bubble pops. From here on in we become a self fulfilling prophesy as we talk our fate into existence.

Im sorry but Australians are collectively a bunch of idiots. GFC hits like a Atomic Bomb we watch it and we pointed and laughed at the “lazy Greeks” and “greedy Americans” all the while we stayed on course following those we laughed at to the slaughter house.

The average Australians still beleives Kevin Rudds pink bats and bank guarantees saved our nation” it was two pinches of F-all.. Trillion dollar China stimulus saved our ass.. And we continued blowing bubbles.

Idiots! Meanwhile the person who wrote the article above can still claim to be unique. Media is purely on the side that the bubble is only in Sydney and Melbourne.. -.- it’s everywhere…

How did a bunch of idiots come so wealthy? Oh wait it’s asset wealth hmmm and denominated in AUD… Fail !

I’m with you Simplicity, Chinese growth and later stimulus with it’s flow through in Mining Capex and FIFO wages is what saved Australia. The evidence is right there for anyone to see, Mining capex was around 2% of GDP and peaked at over 7%. That’s 5% of GDP (about $75B pa today’s dollars) coming from Capex, with probably another 2% from Mining Operations (remember Iron Ore at the peak was priced at $180/Tonne traditionally less than $20 now $60 ). This was all a windfall gain for Australia, it wasn’t planned, it didn’t happen because of the skilled human capital that we’d developed, it didn’t happen because Australian’s productively developed their capital base…. Nope our ass was rescued from a whopping because we happened to be sitting on huge and accessible deposits of Iron ore, Coal and NG and someone wanted them real bad.

Maybe we’ll get lucky and India will become China mk2, but I’m loosing confidence wrt India, the potential is there but unfortunately India’s’ potential is like Africa’s potential (one of those, is ,was and always will be. problems)

As for housing I think Joe the clown said it correctly when he advised people to get better paying jobs (basically same jobs…but better paying) GenX/Y labor needs to organize and adjust their wages to match RE prices. All speaks to an ugly UGLY future while Australians rewrite these fundamental Social contract T’s&C’s.
Personally I’d like to be involved in Australia’s rebirth but to be honest I’m too old to wait around while the system slowly drifts back into balance thereby restoring value to Productive undertakings, I’d like to think a quick reset would fix things but then I look for the human skills required to achieve global competitiveness in the 21st century and I realize they’re in very short supply in Australia.

No, Australians are not stupid, they really have their finger on the pulse and are often described as some of the most financially literate people in the world …. property values always go up, know neither the difference between average and median (which can be more easily manipulated) price nor the real cost of borrowing over lifetime of mortgage e.g. 60%;, clearance rates are valid/reliable.

Micro-wise, the average Australian RE investor is not too bad. But there are still handful of investors with little understanding of how everything works, they just follow advice that house prices goes up and copy their neighbors or family./friends.
But Macro-wise…. the majority of Australians have little clue… the ones that do are not heavily invested in RE or have already cashed out from the RE industry well in advanced, waiting to re-buy when it hits “low” or take advantage of new opportunities as Australia bounces back up.

Kudos to the Author for quality and for bothering to write. I hear you and acknowledge that you can ‘see’ exactly what is going on and ‘down’.
Now, I would really love to hear your ideas on how Australia should set about providing quality, affordable housing in the near and far future please.

Well clearly you didn’t read carefully enough. Basically, he said Mr Market will take care of that the way Mr Market always takes care of these huge imbalances in the economy known as bubble s- collapse of prices – which will bring prices back into balance with economic reality, ie wages. He also said that we should reverse those policies that helped pump up and sustain those imbalances that created the bubble, like cancelling Howards CGT tax cut, removing negative gearing, putting limits on the level of immigration, not allowing people to speculate with super funds in housing, etc, etc, etc to prevent another bubble springing up to such stratospheric heights – what MB’s founders have been banging on for years on this site and before.

re. “…we should reverse those policies that helped pump up and sustain those imbalances that created the bubble, like cancelling Howards CGT tax cut, removing negative gearing, putting limits on the level of immigration, not allowing people to speculate with super funds in housing, etc, etc, etc to prevent another bubble springing up to such stratospheric heights “……

Politics is not economics and neither build quality, affordable housing.
…..and for the record I did read every word of this piece, several times.

The crash will bring prices back to affordable levels, but it’s going to take years to rebuild this joke of an economy. It’s politics that has greatly aggravated this bubble and they have been promoted by both major parties when in power. Clowns, all of them.

There is most definitely a shortage of housing to buy and rent – sub 2% vacancy rates demonstrate that beyond doubt.

What mouse and other shortage deniers are talking about is their belief that there is a lot of housing stock that could be made available with the right policies. They may well be right but that is no consolation to those seeking to rent or buy right now.

More lower cost (affordable is wafty weasel word) housing can be easily acheived. All that is required is for Joe Hockey to get the cheque book and offer to pay the costs of servicing and infrastructure for new land. Place an annual limit to make it a dash for the cash and then sit back and watch serviced blocks of land appear like mushrooms after rain.

No harm in having a large buffer stock of serviced building blocks on tap for new home buyers.

By all means fix the policies that encourage the hoarding of bedrooms but the best policies are ones that lower the cost of new housing as the hoarders will very quickly stop hoarding when the supply shortages disappear.

What would be really awe inspiring is if the present powers to be can turn this mess into something positive for our younger generations. If a ‘deluge’ is all we have to look forward to in the near future then this only confirms that the whole affair has been deliberately engineered as a ‘correction’. Pretty sick really.

There’s no way around it now. Actually, what is important once the crash has happened is to 1 – to rescind those policies that encouraged speculation 2 – to get the economy back on its feet as fast as possible. One suggestion is good old fashioned counter cyclical Keynesianism, ie, fiscal rather than monetary policy – ie – big infrastructure and services projects that are badly needed to help kick start the economy as fast as possible, but make sure the projects meet real, benefit/cost analysis – publically – not the usual stupid secret stuff and “captian’s picks”. Big investment in education and science as part of this counter cyclical push. The worst thing would be a Euro style austerity that just drags out the pain and destroys peoples’ lives as their skills, energy and hope atrophy. Hard, fast and dedicated counter cyclical policies will be necessary.

I should have also added something that has been talked about by much better informed people endlessly here and elsewhere 3 – changing planning laws, like getting rid of growth boundaries, etc, that have stifled housing construction by encouraging land speculation/banking and pushing up the cost of new housing.

I’d like to add that I do not actually look forward to a crash. I’ve just got back from Europe and it’s terrible, frightening even. The last thing we want is Euro style austerity after the inevitable crash that just prolongs the agony to no good end.

I doubt that gen Y can make a difference alone. Yes they should avoid the debt at all costs, but unless the leash goes on speculators (local and foreign) they will merely become the renters the system needs.

Firstly. If this was indeed authored by a Gen Y, then it reconfirms my faith in the capacity of the human spirit to embrace education and recognise injustice when it sees it.

Secondly, as “Green” quite rightly posts above,“This isn’t policy failure. It is the desired outcome.” But it is the same type of policy outcome that saw investment banks structure complex financial packages that they knew were certain to fail, and took the protective measure to capitalise on that. Policy outcome, it may have been. Good policy outcome….it hasn’t and certainly won’t be.
As I suggested earlier in the week , the most perilous part of this whole mess is right in front of us now. It’s not the Popping of the Bubble, but one last exhasted gasp to try to keep it inflated. That….is going to the the unnecessary undoing of many, many Australians.

I’m afraid that the choices will be:
1) Bail-out the banks….no, too expensive for the taxpayer.
2) Bail-in…yes, as in Cyprus and more recently in Austria.
Because of the likely option 2), the people with the most money in the bank…the Boomer Generation will be ruined.

As I’ve said many times on this site, the distinct dislike from people on this site for the Boomers is misdirected because they will suffer the most, as they have the most to lose when the following happens:
# housing market crash
# stock market crash
# bond market crash
# depositor bail-ins to alleviate bank failures

98% of boomers will depend on the old-age pension at great expense to the X,Y and Millenials.
Worst of all parents and grandparents will be knocking on your door to use the spare room …forever.

Blaming all this on ‘policy outcome’ ? I don’t think so!! Banks are a business and they work within boundaries to garnish a profit. Their boundaries are far too broad imo. It would take a gutsy Australian Govt to re-establish tighter bank boundary policy…..either that or we will be up to our necks in stinking bubble popping sludge.

Banks didn’t inflate the Bubble. As you suggest, they only work with what they are given – the Rules. (NB: In the main! There are those institutions that just plain ignored the rules!). The Policy Outcome is one that WE allowed our Governments to implement. But,frankly, WE didn’t know what we were allowing them to do. It looked all so easy to bridge the gap between ‘what we were paid, and what we spent’ with debt secured by rising property prices. So Policy Outcome is what we egged-on. No Government was going to stop it once it got going. They would never have been elected to Government if they’d campaigned on such.
It was community Policy Outcome that created this mess. Not the banks; but the Government WE elected. Now WE are going to pay the price for blissful ignorance….

But banks define those boundaries themselves via their political capital. By the very nature of credit creation, Banks own this system. They have designed these “Rules” to suit themselves. Regulation is largely illusory. They are driving this. They are shaping the values that help to create a steady stream of new passengers.

Pre December 1983 in Australia; March 1985 in NZ, The Banks were pretty much on a leash. They were subject to capital and currency control. We allowed that leash to be removed. Sure, the change may have been engineered by the embryo of the banking system that has brought us to the edge of calamity, and yes, it is a global phenomenon. But without us voting for it to happen or continue, it wouldn’t have. Maybe what we have today is better than what otherwise would have had? We just don’t know. But what we do know is what we have, and it’s looking nasty….

After posting a victory call the other day, I shared this article yesterday, it received no comments and only 4 ‘likes’ . I think i will be receiving less christmas cards this year, and zero barbecue invites, but i do not fucking care! Most of my associates are drowning in egg, and I’m too busy eating popcorn. Proud CrashNik!

I have been banging on about our crazy RE market for years. Upset a lot of people. My wife has forbidden me to raise the subject. Can’t blame her as I have been ‘wrong’ for so long I even started to look for wholes in my own argument.
I am now waiting to see how all this pans out. I have invested off shore and am continuing to do so. Will sell all my Aussie bank stocks in new FY and moving to overweight cash. Also putting some cash aside to bail out kids who got sucked in with all the BS. I don’t blame them for buying RE because I didn’t see the rental market as a great viable alternative – too disruptive and substandard.
For myself I do not care too much but for my children and for other youngsters I worry that we are leaving a terrible legacy.
Always been a Liberal voter but not any more. Didn’t vote for them in last election and will never vote for them again. Mob of fucking selfish clowns. I hope their super fund blows up.

How easy is it to open a US bank account? I have an Irish bank account and my Aussie account but I’m thinking of moving my $AUD to the US and a US bank and leaving my other savings from my time in Europe in the Irish account (even though Eurozone is still shit).

I don’t trust the Australian government not to do a bail-in style of ‘bail out’.

The idea of shifting cash into a multi-currency account sounds appealing but you pay a slice getting the money in and then getting it out. Plus while it is in there you are getting no interest which adds another few percent each year to the cost of doing so.

So if you are confident of large depreciations and that HBSC will not go bust (the account does not have a govt guarantee) then it may be worth considering.

That’s it. Intensify the battle. As the bubble got stupider I went in harder. I’ve even gathered a posse. The last month or so has been glorious with bubbles on everyone’s lips…and not the usual slackjawed yokel drool bubble.

I was a back in another life. Forwards used to love coming at me to run over the top. Smash ’em a few times and they look for an easier route. Eventually they’ll stop coming. No heart see.

I reckon specufestors have no heart either. They look for the easy way. That’s what will destroy them.

Yeah – it’s called H2S (hydrogen sulfide) – and not only it stinks – it’s also very toxic. Sooo… not that anyone will miss the REA rats or the bidding infestors, but just it’s merely for your own safety, just so you know – stay upwind, and on high ground (H2S is heavier than air).

On the other hand – mercaptans might be just as good, and whilst not as toxic, they’re quite flammable, so really you have to choose your poison here (as it were)

To quote from Ignition! by John D. Clark :

But its performance was below that of a straight hydrocarbon, and its odor — ! Well, its odor was something to consider. Intense, pervasive and penetrating, and resembling the stink of an enraged skunk, but surpassing, by far, the best efforts of the most vigorous specimen of Mephitis mephitis. It also clings to the clothes and the skin. But rocketeers are a hardy breed, and the stuff was duly and successfully fired, although it is rumored that certain rocket mechanics were excluded from their car pools and had to run behind. Ten years after it was fired at the Naval Air Rocket Test Station — NARTS — the odor was still noticeable around the test areas. (And at NARTS, with more zeal than judgment, I actually developed an analysis for it!)
…And finally he surpassed himself with something that had a dimethylamino group attached to a mercaptan sulfur, and whose odor can’t, with all the resources of the English language, even be described. It also drew flies. This was too much, even for Pino and his unregenerate crew, and they banished it to a hole in the ground another two hundred yards farther out into the tule marshes. Some months later, in the dead of night, they surreptitiously consigned it to the bottom of San Francisco Bay.

Forget the words then! It’s a melody that will stay in peoples’ heads now. One they will humm repeatedly, without realising that they are. One that will wake them in the night, and a cold sweat will cover their body as they toss and turn with ” I should have sold last week! Maybe it will be better next week?”

I can see the irony….I can see how easy it is to play the blame game too, suffice to say that I don’t blame the Australian people, not for one minute. The only way we can say “No! Enough already” is when we cast our Federal Election vote-but as pointed out before on here, our electoral system is a thwarted one re. Preferential system.

Yeah, the irony being that this is the person who claimed y’day that they and all their Gen Y friends were in the property market and cheering it on. Delusional is right. Cheering will turn to screaming and then to sobbing.

jdliveuk is trolling, doesnt have much respect for this site and the posters here.
Let him be, he doesnt matter in the end…. too tiny to matter and so are we… things will unfold when logic prevails.

His wife has Toorak bred Gen Y friends apparently with fully paid homes and multiple investment properties. Must be friends with multi-millionaire families if so, it doesnt apply.

I also do get miffed by the entitlement demand Gen Ys (some), who work entry jobs but expect to live in suburbs or areas where their managers and bosses live in, without working their way up first.

But for most, those with young families just trying to buy a house reasonably positioned from the city but have to compete with negative-gear chasing investors pushing the prices 50-100K above the area medians; I am sympathetic towards.

If Australia’s house bubble started in 1999, thats the same time when Clinton started lobbying for “affordable” housing for everyone in USA, effectively blowing a bubble there. That bubble collapse, and now it’s our turn, policy and China Inc have kept ours going for longer than even US could manage. It will be truly epic when it finally starts to unravel (it probably already has started).

“Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.

The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”

Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).

Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the law’s reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasn’t until the middle of 2007 that the Fed decided it was time to crack down on abusive pratices in the subprime lending market. Oops.

Better targets for blame in government circles might be the 2000 law which ensured that credit default swaps would remain unregulated, the SEC’s puzzling 2004 decision to allow the largest brokerage firms to borrow upwards of 30 times their capital and that same agency’s failure to oversee those brokerage firms in subsequent years as many gorged on subprime debt. (Barry Ritholtz had an excellent and more comprehensive survey of how Washington contributed to the crisis in this week’s Barron’s.)

There’s plenty more good reading on the CRA and the subprime crisis out in the blogosphere. Ellen Seidman, who headed the Office of Thrift Supervision in the late 90s, has written several fact-filled posts about the CRA controversey, including one just last week. University of Oregon professor and economist Mark Thoma has also defended the CRA on his blog. I also learned something from a post back in April by Robert Gordon, a senior fellow at the Center for American Progress, which ends with this ditty:

It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did. And that is not political correctness. It is correctness.

Skip here… from a post WWII perspective the whole enchilada starts with Milton – Stigler and Herbert Nelson. The story starts like this: In 1946, Herbert Nelson was the chief lobbyist and executive vice president for the National Association of Real Estate Boards, and one of the highest paid lobbyists in the nation. Mr. Nelson’s real estate constituency was unhappy with rent control laws that Truman kept in effect after the war ended. Nelson and his real estate lobby led what investigators discovered was the most formidable and best-funded opposition to President Truman in the post-war years, amassing some $5,000,000 for their lobby efforts—that’s $5mln in 1946 dollars, or roughly $60 million in 2012 dollars.

So Herbert Nelson contracted out the PR services of the Foundation for Economic Education to concoct propaganda designed to shore up the National Real Estate lobby’s legislative drive — and the propagandists who took on the job were Milton Friedman and his U Chicago cohort, George Stigler.

To understand the sort of person Herbert Nelson was, here is a letter he wrote in 1949 that Congressional investigators discovered and recorded:

Quote
“I do not believe in democracy. I think it stinks. I don’t think anybody except direct taxpayers should be allowed to vote. I don’t believe women should be allowed to vote at all. Ever since they started, our public affairs have been in a worse mess than ever.”

Skippy…. all Clinton did was give Rubin carte blanche, tho Rubin is just second gen Chicago.

It might be too early, but I had a quick scan on realestate.com.au and it seems there were a few more ‘cheaper’ rental options in my area than previous couple of weeks. The real expensive stuff is simply not getting rented. A couple of which were recently auctioned houses that sold for record profits to ‘investors’. Hmmmm and this is Sydney.

I mean what a twit – if its a bubble it will crash. Yes you are totally financially illiterate – and completely self obsessed. Have a bit of patience. Not much more than a generation ago (which is not that long) – very few could even get a housing mortgage. Hence why that one graph is totally bogus… My father didn’t have shoes until he was nine – my mother of nine lived in a two room house with not much on the West of Eire.

The use of generations is wildly inaccurate, its pop culture narrative writing.

“The commercial success of this pseudoscientific mumbo-jumbo is irritating, but also troubling. The dominant US thinkers on the generational question tend to flatten social distinctions, relying on cherry-picked examples and reifying a vision of a ‘society’ that’s made up mostly of the white and middle-class. In an article in The Chronicle of Higher Education in 2009 on the pundits and consultants who market information about ‘millennials’ to universities, Eric Hoover described Howe and Strauss’s influential book about that generation, Millennials Rising: The Next Great Generation (2000), as a work ‘based on a hodgepodge of anecdotes, statistics, and pop-culture references’ with the only new empirical evidence being a body of around 600 interviews of high-school seniors, all living in wealthy Fairfax County, Virginia.”

As did my dad. One of eight. No proper shoes until he was 12-13. Worked his ass off and retired in mid-late fifties. Was over a few months ago and he tapped me on the shoulder and said you guys are working way too hard and long hours, sending your self into an early grave. Some perspective huh!

You should reread the article RT. I’ve explained to more people than I can count that I’m angry because the prior generations and the media/industry/politics that they designed has blown up the economy. In the ultimate sense, I don’t give a shit about owning a house and a mortgage. I’m financially literate, a happy renter and have a balanced portfolio with no interests in housing, banks and miners.

What actually makes me angry is the severe level of risk and economic imbalance that has been thrust upon us. That unemployment, destroyed government finances, bankruptcies, confiscated savings, generation long deflation, and ultimately an undiversified hollowed out economy sacrificed on the altar of the gods of finance is what will be left for us to clean up.

You obviously have an inability to parse irony or cynicism, because I deliberately flew the flag of an entitled landless Gen Y to prove the point that my eventual aspirations for a secure future should not preclude me from criticising the worst set of economic and financial imbalances in 100 years.

You clearly think it should preclude me, which places you squarely into the “defenders of the status quo with severe cognitive dissonance”. Worse its just classic playing the person. Young people have every right to be angry, and it seems quite likely the you are simply jealous of my cutting prose.

If you got to the end of the article, you’ll notice that my only counsel is for patience and the wonders of Mr Market to do the rest. I know its long, but best to read it before casting aspersions.

Ha ha ha – Researchtime, you really are a Turd looking for a plug hole.

“Not much more than a generation ago (which is not that long) – very few could even get a housing mortgage. ”

Yeah and a generation or two before that a fair percentage of the worlds population were legally owned by somebody else – it is called social progress you backward thinking troglodyte. Since that time the world’s economy has enjoyed spectacular growth, yet you seem to think that it is fine and dandy that your parents biggest contribution to social advancement since they were running around in bare feet, is a reduction in home ownership?

Nah, I think the biggest reason behind your thoroughly un-researched comments re Matt’s article is sour grapes – sourness that the mighty armchair academic, pseudo-intellectual “ResearchTime” hasn’t been asked by MB, despite all his daily posts, to have any of his work published. Boo hoo!

As I’ve said before RT, I’d get someone to take a look at that chip on your shoulder before it leads to such curvature of the spine that you spend the rest of your days looking at your withered and malformed genitalia.

The truth is you just want a whinge on how tough life is, and for mum to pat your back… collectively, we are weak and introspective. This coming crash will wipe that self pity away. Breed a tougher generation.

Hey Retard, you really need to look up what inflation does to nominal debt. I would buy anything and everything I could get my hands on if interest rates were at 13% now (with concomitant wage rises) and lower rates in the future.

RT, the internal contradiction of what you just said is astounding enough to know when I’m being baited. Well done, it worked. But I’m resilient and have a very comfortable life actually. I don’t do it hard, but neither do I accept that that just makes me a whinger. That’s a logical fallacy and a strw man argument. I am one of the ones saying that a crash is the only way to clear out the deadwood and restore a sense of shared sacrifice, egalitarianism and hard work.

You’re tilting at windmills dude. I am not the enemy. You’re just a bitter and twisted moral high grounder that must be seen to know better even when you are essentially in agreement with the target of your scorn. Met many of those sorts in my internet debates of yore. And I know when to walk away (now).

If on the other hand you wish to debate the actual subject matter – eg. Like Bullion Barron’s argument on the national nature of the bubble – it would be welcome. That empowers us all and advances the cause and collective knowlegde.

Seriously guys, take a chill pill… whats the big deal about owning your own home? Most of you are flat out wanting to kicking out grannie from hers… this is all so First World stuff. The article above reeks of pure self obsession, as are some of the criticisms above. You live in one of the worlds best countries – and yet all you can think is personal vitriol, as if you think it really affects me. Most of the opinions above are based upon self interested ignorance.

A crash is coming, and you can complain even more then. But I suspect none of you will benefit – because you are not in the right frame of mind. A bubble (in any shape or form) by definition is not a permanent situation. Think ahead… be smart.

Not much more than a generation ago (which is not that long) – very few could even get a housing mortgage.

That is Orwellian double speak – turning a vice into a virtue!! Very few could even get a housing mortgage.. but home ownership was higher then!! i.e. not many had to get a mortgage in order to buy a home !!

Mav – not true. I have no debt – and I have urged others to sell their homes and put the monies into USD. And I rent.

People of this website (in general) I have found – appear to have no financial sense. They are merchants of debt – and willing victims of their circumstances. They are lazy intellectually – who use the above bear porn to get themselves into the lather. Its always someone else’s fault. The government should bail them out, etc, etc. And the same names keep cropping up…

I have said it before guys, and I will say it again… bubbles are sometimes the best way to make money if you have the opportunity. Ride it up if you can, or buy at the bottom. Now the truth is personality will only allow you to do one or the other, but not both!!! When their is blood in the streets buy property – which is true today as it was hundreds of years ago…

That light-weight piece is all about missing out – that if I don’t buy now I will never afford it it… And you are all sucking the titty of despair. Lock, stock… unfortunately, some of the biggest names on this blog site have succumbed to. And thats sad. Whinging will get you nowhere. And more importantly, it won’t change your circumstances… the truth is the pollies won’t do anything. Its entirely up to you.

ResearchTime. I’ve been baffled by your rhetoric of past, now this confirms it. I’m dsregarding all you say from now on knowing this is your hidden ideology. Subjective, tribalistic and showing utter contempt for objective analysis of reality because it disagrees with your view of the world. Disgraceful.

Research I suspect the people you are calling fiancially illiterate probably have more savings and a greater capacity to seize the opportunities that a property downturn may present than the average Australian.

I don’t see the self-pity you seem to see. I see people angry at social injustice. I’m sure I’ll fare better than most Australians out there if there is a property down turn. But the social injustice does still irk me.

It’s called actually caring about someone that’s not yourself. Try it sometime. It brings out a smile 🙂

I’d reckon a generation X who thinks he’s a touch smarter than the average bear, is all ‘free market yeah baby’ and doesn’t own a house (outright) probably might want to be a bit more honest with themselves about how clever a market player they have been… over the last 20yrs!! hehe.

Yeah yeah there’s a crash coming and you’l be rich then eh? refer the fine comments from Reusa..

Memory are indeed selective. Back then, it was very hard to get a housing mortgage from BANKS, because it was lucrative for banks to lend to businesses. Which is why Australia had building societies (and credit unions) to cater to the housing market. Then deregulation happen, and the banks bough all of the building societies and don’t bother to evaluate loans since money is too cheap.

It was so “hard” that home ownership as a percentage of the population peaked in the early 60s – (The graphs were posted on this site some time ago) As per the article, making credit freely available is at the core of this, and is actually having the effect of reducing home ownership.

hamish,
yeah, buying a home was so easy back then that the fed gov started up War Services Homes. My old man was ex WW2 and they got a fixed interest home loan for 3000pounds (1959). I don’t know what the % of home owners was back then, but I do know lots of war service homes about in the area I grew up in.

I cashed in an NZ property moving back to Oz in the 70’s and could only get bridging finance from ANZ until I became eligible years later for a State Bank loan. The big 4 were not interested in residential mortgages.Then the bank was privatised, then went bust while I was paying through the nostrils. I feel for the young buyer who can even swing a loan today. I wonder whether they would ever be debt free.

The analysis of asset bubbles to determine when they will break needs a log y-axis and decent skill in fitting trend lines and channels over this data in order to determine blow off booms etc.
Using a linear y-axis over a long period as everyone does with housing conceals the fact that every long term series also looks like a bubble. It is just the exponential maths of the same annual increase eventually left long enough in time causing huge numbers.
I keep looking for the actual numbers behind this Soos real house price long term chart (figure 1 above)so I can bung it on a log y-axis but cannot find them.
Does anyone know where they are?

Fair comment, Roberto. You would have to trawl colonial records to get the early years of Soos 1880-onward series. Later stuff is Stapledon and then ABS. That last data source, which covers from memory since the mid 1960’s is available in spreadsheet on their website. Log it, I’d love to see.

@flyingfox BS as including imputed income? In other words, the real income level is lower and the ratios higher? Is there an accurate estimate of the quantum of these?
Just dealing with doubts about my understanding. Thanks.

Actually we are in a bubble. Sorry to contradict those that are trying to convince themselves we are not. Classical, or what I call simpleton economics, does not explain increases in asset prices (bubbles). However, alternative economic models and modelling the Australian economy does confirm we have a bubble. My expectation is at some point a rapid period of de-leveraging (a Seneca Cliff) and a collapse in asset (house) prices will occur. Prior to the start of what now a period of ‘greater fools’ I would have expected the ‘boom’ to continue and be continually propped up by government. Now I think sentiment will change quickly and a rapid decline will follow.

It was Greens senator Peter Whish-Wilson who asked the question in senate estimates that prompted Fraser’s declaration of a “bubble”. When Whish-Wilson pressed Fraser further about the impact of negative gearing on price rises, he demurred, blaming instead record low interest rates and the availability of finance.

The party has been working on housing affordability ideas for some time and on Sunday released its proposal to end negative gearing, but quarantine existing investments to avoid a shock to the market. The Parliamentary Budget Office costings show savings – amounting to about $4 billion a year over the next decade – which the Greens would invest in public housing.

The Greens argue that negative gearing, which allows investors to deduct losses from their investment property from their taxable wages, distorts the market and disproportionately favours the wealthy, who can avoid higher tax rates.

“It’s very uneven if you’re going to an auction as a first-home buyer and you’re competing against somebody who has an existing property and the banks and financial advisers have said the smartest thing they can do to hide income is go buy another one, which will be concessionally taxed when they finally sell it and they can write off everything,” says Greens co-deputy leader Scott Ludlam.

I’ve been pushing the Greens a fair bit on this on Facebook. Good to see their housing policy has grown to target the real culprits of unaffordability, rather than just treating the symptom with more Govt housing.

“Chinese buyers are looking to flee Auckland property. Anecdotal evidence suggests Chinese buyers were spooked by Budget 2015. Investors with “naughty money” fear IRD information sharing with China” (National Business Review – latest locked issue)
From 1/10/15 all property transactions in NZ HAVE to have an tax number included in the transfer, and transactions have to be supported by a local bank account.

the arse fell out of their market because lending seized up (GFC). That didnt happen to the same extent in Australia (though house prices did dip substantially in 2008).
Do you expect it to happen again? Why?

Since the Fed stepped in, housing has recovered particularly in high income and supply constrained markets such as SF and NY which mirror Sydney in particular

In 2008/09 Australia’s economy and therefore the property/banking industry was bailed out by Chinese expansion. Now the Australian economy is totally hollowed out – this isn’t going to happen again and debt is at an even higher level.

Eventually there is insufficient income to sustain the debt. The income is key – the asset values are ephemeral without the debt expanding.

As for a credit crunch – the banks are back to be heavily reliant on offshore funding and once the lenders start wanting to reallocate their funds (ie loss of AAA, growing bad debts and/or slowing volumes start to bite or perhaps an external event) – the funding will be pulled and regardless of how low Glenn cuts rates, there will be a rationing of capital. The amount of asset value being sustained by a declining level of credit will lead to an inevitable bust. The crazy ratio of investors to owners will begin turbo charging the market in the opposite direction.

NY and SF attract the best and brightest from an enormous population.

Sydney and Melbourne do not. Worse than that – Melbourne has close to zero industry and Sydney has FIRE industry sucking the teat of the property bubble.

“Not a single mention of it. So we started from the front and worked our way quickly through the paper… page seven… here it is… “Rescues: RBA borrowed billions from Fed” was the headline… but no, this isn’t what we’re looking for.

On we went, past the big centre-fold spread telling readers that the AFR contains, “Up-to-the-minute market information, news, commentary and expert analysis… All from just $44 per month”.

We continued… through to the end. Not peep. Not a single mention.

And the AFR is supposed to be Australia’s premium business newspaper. We wouldn’t have thought so.

About all it’s good for is lining bird cages in our opinion.

But then, we guess if the AFR exposed the banks’ duplicity it wouldn’t be able to get an interview with the likes of Commonwealth Bank of Australia [ASX: CBA] CEO Sir. Ralph Norris.

Said person is the feature item in the Boss glossy mag insert in today’s AFR.

We can’t be bothered reading it. It’s surely pap.

But anyway, what the heck are we going on about? This…

I’m talking about the near collapse of the Australian banking system in 2008. I’m talking about the likelihood of two Australian banks collapsing in 2008 if they hadn’t secured a secret loan from the US Federal Reserve.

The fact that National Australia Bank [ASX: NAB] had to borrow USD$4.5 billion from the US Federal Reserve during 2008 and 2009.

And Westpac Banking Corp [ASX: WBC] needed USD$1.09 billion in January of 2008 and 2009.

What’s that, you don’t know anything about it?

And you don’t remember reading about it?

There’s a simple reason for that. It’s been top secret information until yesterday morning.

Thanks for highlighting this. Had a short but heated tweet convo with lincom and Chris Caton of Westpac recently. When asked about Westpac tapping into the FED, he deflected and the was the end of the convo. Short memories.

That didnt happen to the same extent in Australia

Really? See above for one. Also the about the only time I remember banks treating depositors like royalty as opposed to borrowers.

We may well be in a bubble in Sydney, but the assurance by bitter, angry, clearly ‘frustrated’ Gen whatevers, that we are, indicates we may still be a fair way off a top.
There are some significant factors looming that could push house prices a long way yet.

When Steve Keen said house prices could fall 40%, I offered that is was more likely house prices would rise 40% and then if house prices fell say 40%, you wouldn’t be in too bad a situation if prices started rising again from there. That could well be the position now as well.

What I can’t understand is why there isn’t the same hue and cry about stock prices ? You know, peoples super, ie life savings. Is that not equally important ?

Boomers care about stocks because they didn’t have to worry about houses, they do now.

Have you ever been pushed from pillar to post at the whim of negatively geared fucking landlords, when you have a young family to look after? Moving houses every 6 months to a year!

I don’t give two fucks about the Boomers retirement plans, sell the fucking Landcruiser, and Caravan, and Boat, and Investment Properties. The Boomers have shown no sympathy whatsoever to the following generations. They can go and fuck themselves.

You forgot to mention the “Sorry no pet’s mantra” also. That drives me nuts. Like Pets in their dilapidated shit hole they rent out are going to ‘ruin it’. It’s almost impossible to find a place that allows pets.

Solidarity brother! I feel for you. I’ve not had to move much (9 yrs in the same digs) until a year ago. Despite the $110k income and written-on-paper glowing reference from the property manager I couldn’t get a fucking lease on a new one before geeting the boot from the old one. So 3 months back with Mum and Dad. meanwhile my poor old housemate had to spend that time living at a backpackers. Yeah that does wonders for self esteem. In the end I faked a relationship with a prospective housemate and applied as a couple. First application – boom we got it. All 3 of us happy as Larry. 8km from the city in a 5BR house. Landlord seems ok when we met her (divorce, kept the house, took work interstate). We’ve had 4 property managers in 14 months. They’re chasing a 1.5% rental increase on $2500pcm.

Bank stocks will crash when the bubble bursts, or maybe before, and when considering banks make up around 30 to 40% of the ASX200 I suspect many people will loose out not only because they own property but also loose out because their superannuation has them invested in bank stocks.

It’s a good article and agree with a lot of the content. I also agree that property Australia wide is expensive… but a nationwide bubble? That I don’t agree on.

How long would property have to remain at higher levels relative to wages or in real terms (compared with the 1990s) before those who claim we have a nationwide bubble concede that it is just more expensive today and may continue to be? It’s been 12 years already (using the chart provided as a rough measure)…

Maybe there is someone who thought it was a bubble in that 1950 spike and decided to wait for mean reversion… could have been someone at the 1989 peak who thought similar and are still waiting for prices to come down.

3 bedroom homes, 12-15km from the city. With a 10% + costs deposit, a $230k mortgage, you could be paying it off with around $260pw (P&I). Not glamorous, but I think even a family on a single income could do that.

You have to come in under certain income limits for the Affordable Homes program, but similarly priced homes can be found outside of it in Adelaide. I don’t think we have a bubble in Adelaide, but it’s expensive on a historical basis.

Hey Bullion, I certainly acknowledge the possibility of that perspective, and as you know we have agreed to disagree on that a few times. But that said, my chief advice is patience in the current circumstances. As stated, the astronomical levels of risk at this late stage is the real and unfair dilemma facing most young people. It’s very simple to say either “just buy now” or “don’t buy now”, but that decision is an excruciating one for a lot of people who see the risks.

Whether or not the whole country is in the same magnitude bubble is a moot point I would argue. The fallout from the crash we WILL have will be far reaching and devastating enough that taking on debt and a very risky asset is not advice I would give anyone right now, mo matter the regional subtleties.

Therefore waiting this current insanity out at least until we understand the scale and nature of the combined housing and mining busts is the best financial advice. What do we possibly have to lose from waiting in that context, as I’ve argued? It’s not about timing the market, its about understanding risk, which is the fundamental point I’m trying to make about financial literacy.

It’s one reason I follow Greater Fool (Garth Turner). He is a conservative old schooler, but he gives young people real advice about finances, and it doesn’t involve taking a leveraged single asset strategy at the top of a bubble…

If however you can pay cash for a very modest place because you need to do so for whatever reason, all power to you 🙂

Adelaide is in a bubble (for Adelaide) – and facimg very strong unemployment and State Govt headwinds. There are few drivers of growth and demographics are against it. I thunk it will get hammered along with the rest of Australia as sentiment towards property changes. But if you can pay cash then that lessens the downside risk – leverage is where the pain will be felt.

3 bedroom homes, 12-15km from the city. With a 10% + costs deposit, a $230k mortgage, you could be paying it off with around $260pw (P&I). Not glamorous, but I think even a family on a single income could do that.

Don’t know where your $260/wk comes from. $230k @ 5% for 30 years is $287/wk. A more realistic 7% is $355/wk.

I think you’ll find that if you change the base minimum for entry level jobs you’ll also change much above that to. I agree this matters little to those in highly skilled jobs BB but, like many here I have my doubts about Australia creating a lot of quality jobs while property remains pricey.

“Maybe there is someone who thought it was a bubble in that 1950 spike and decided to wait for mean reversion… could have been someone at the 1989 peak who thought similar and are still waiting for prices to come down.”

I think it’s important to acknowledge the difference in scale.

The 1950 spike was in the range of maybe 50%, and the 1989 spike was maybe 30%. The spike from 1999 onward was 100%.

It took the best part of half a century from around 1950 to 2000 coupled with the strong economic growth and stability of the post war period for prices to double the first time. It then took 10-15 years for prices to double the second time, on the back of a massive expansion in household debt and a historic mining boom.

I expect a larger fall than 2003 (when the Sydney market turns down), but not the 50% crash in real values that is expected by some.

Many other cities are still lower or around the same prices as 5 years ago, I don’t think a cyclical downturn in Sydney will have much impact on other cities.

That said the GFS is still in a fragile state and if we see a GFC Mach2 then we could see a more significant correction across the board, but that won’t be a result of poor sentiment from a downturn in Sydney.

I get the rant and fair enough, blowing the tubes is essential from time to time. I like some points, but selective factual elements woven within the narrative are hard to swallow. Rational Radical’s blog site admits to a self serving angry young Turk economic perspective which I find interesting but polarising.

I respect Matt’s views and won’t attempt to critique his work except to say that I don’t recall the IMF or OECD warning about the gathering storm until recently. In fact, they are implicit in maintaining the twisted groupthink of mainstream economists ill advising politicians.The housing market is just one of many victims. Youth unemployment has greater consequences for society now and in the future.

Cycles from the 70’s are replete with bubbles, but forty years on there remains systemic economic imbalance. Macroeconomic policies are not crafted taking advantage of floating fiat currencies. Monetary and fiscal policies should complement, not work against each other. Fraser and Stevens have finally worked it out, but the neoliberal lobby is too powerful and will win this round.

It doesn’t have to end in a crash, but the political will is insufficient to work through the problem.

It is a human system, that can be manipulated by those in charge of it, to choose winners and losers
I don’t think RR would disagree with that. In fact I think that is a part of the point being made it’s just that there are consequences from doing this. I do have some concerns over targeting BBs as a generation. That sort of narrative is never helpful and only serves to alienate people.

Yes I see that Alex. Skip mentioned somewhere in the blog about RR flattening demographics to position an argument. That’s a better example of what I meant by the polarising element. It was a thought provoking article .

No dramas Mal. I think we’re pretty much in agreement – in my post above I was actually referring to comings remarks. I do think Stevens has had a very good idea about many of the problems for some time – at least a few years anyway. You are right in saying it all means naught without the political will and that seems a long way off still unfortunately.

For example, while a bit more extreme than my own view at the time, the OECD estimated that Australian house prices in 2004 were 51.8% overvalued. This compared to just 1.8% for US housing and 32.8% for the UK.

Thanks FF I don’t have the OECD info to hand, but I imagine Oliver had his numbers correct. The headline data is interesting in 2004 when Costello had the mining development boom as a backstop and brought in a surplus. GDP was nudging 4% from memory, unemployment 6% (courtesy of the NAIRU) but Howard had the foresight to increase welfare, job training programs and home owner grants. McFarlane pushed up rates to 5.5% in 04/05 as inflation was heading towards 3% – ah those halcyon days!. Was it only ten years ago? I’m getting too old for reminiscing.
I’m grateful you highlighted this FF, as it illustrates that when the economy has idle capacity and overvalued asset prices, the government has fiscal policy choice to overcome the social issues caused by these blips around the cycles. Swan got it for a fleeting moment in the GFC, but pulled the plug too soon. With our fiat currency Hockey could emulate the examples, but he thinks sovereign governments have to borrow to spend so I won’t hold my breath.

Now it’s more about the politics than economics. Sadly Bowen is talking about a surplus which is neolibspeak for austerity so the rot continues.

What happened was we got a huge income boost from the coming mining boom. Sydney went nowhere form 2003 to 2011 and incomes caught up. The investors moves to Perth, Melbourne and Brisbane and by the time GFC came around, all cities were over valued by up to the OECD nominated amount at some point.

All the policy responses were to make sure things didn’t go down. Holistically, the effort to keep this has been monumental without the government doing much actually. Huge pop increases, a whole gen of FHB buyers sacrificed at the alter, banks leveraing unimaginably etc etc and then came China and now zirp. What ammo do we have left? Sacrifice the dollar and look the other way when inflation hits?

I don’t disagree FF. Howard had the revenue from mining investment to fund fiscal expansion – he/we were lucky and the pack of cards has been thus balanced until the arse fell out of IO . Inflation is remote given the unused capacity (labour) in the economy. The dollar will settle wherever it settles – RBA can wriggle a bit but it will find it’s own level. On current form the dollar will crash when China’s glide has a nose dive if we don’t shuffle the economy into growth..
The ammo we have is the ability for the government to use fiscal expansion probably via infrastructure projects or work programmes to pump the demand side. There are risks, but they are manageable and insignificant compared to the upcoming crisis and doing more of the same. Deficits at this stage in the cycle are necessary to counter lack of spending in the private sector. It is doable, but a fresh economic perspective is crucial.

True – the Swan turned it off way too soon.
The rating agency shamans will read the chicken guts in any way that suits their criminal purpose. They downgraded Japan year on year but the yen is still in the mix. If they were as clever as they profess the GFC should have stood out like a brick shithouse.
The poor old pollies -Haha. I feel sorry for the hapless bunch.

RR, I liked the spirited way you placed the ‘contributors’ to what we have inside an octagon as they each have a post of their own; FIRE, media, Gov’t/ATO, Gov’t/ regulators,politicians, collective interests, historical trends, and finally, the ‘driver’, individual behaviours. Let’s see who ‘taps out’ first and who is ‘last’ in the coming grudge match.
I’m glad you assailed the level of personal debt that has been encouraged, endorsed and celebrated across this land to keep the ‘feather in the air’ for so long as this is the required ingredient to keep this perpetually dying creature alive just abit longer for the next wave of participants.
We lined up around the block as if the bank was nightspot #1 as we observed ( with our own eyes) what to do and where to go, as it’s in our DNA to queue. Of course we had encouragement from all those in the line already and the ones leaving the ‘club’ always gave us the ‘thumbs up’ as we searched their faces for signs of remorse but there never was any, even if they bent over and threw up around the corner where we could not see them. We completely forgot that people will always validate their behaviour especially if it means ‘they’ win and ‘you’ lose in most zero sum transactions and especially here, in rising home prices.
I think what you’ve written is much like the shells the ski resorts occasionally have to deploy to mitigate the clear and present dangers that heavy snow build up can bring. An exploding shell may or may not precipitate the required effect which is to release the potential energy forces that threaten and often, it may take days to work. Some things are just hard to control and predict. But, most would agree, that the concussion blast from the howitzer itself ( a righteously loud event) can make a contribution that has been seen to occasionally get the job done all on its own.https://www.youtube.com/watch?v=WrNekoXniJM

I modified your search a little, opting for “housing bubble” only, then requested data since 2004, the spike at the end of the graph is interesting, fascinating data I shall be watching closely. Hopefully all this bubble searching will lead to wisdom, however I doubt it. To many people are saying “they have been saying its a bubble for years and nothing happened”

Most the search terms are also rated as “breakout” This is googles definition of breakout

“For each rising search term, you’ll see a percentage of the term’s growth over a period of time. If you see Breakout instead of an actual percentage, it means that the search term experienced growth greater than 5000%.”

Regarding a “Bail-In” of banks, does anyone know what the limits are of where they can take money from ?? ie I assume they can take from my NAB account, but can they take from my NAB trade account (or WealthHub Securities Limited) as they are not a deposit taking institution.

What about the Gen X that are contributing to the bubble? These are the type of people I had in mind when I mentioned a boycott earlier.Rent and invest, how the Australian dream has reversedhttp://www.afr.com/real-estate/residential/rent-and-invest-how-the-australian-dream-has-reversed-20150612-ghlyh7
Google title if blockedThe couple, in their 30s, rent while owning two investment properties in inner Melbourne with high loan-to-value ratios. Standing inside the living room of their one-bedroom apartment, Melissa Pritchard and her husband Lachlan Envall don’t look like property moguls in the making. But they already own two investment properties in Melbourne’s Elwood, even though they rent their own home in South Yarra.Fresh figures from Martin North’s Digital Finance Analytics, released on Friday, show more than half of first home buyers in NSW and one in three first home buyers in Victoria are investors. It is expected for the first time that more first time buyers are will be investors rather than owner-occupiers by the end of this year.
Digital Finance Analytics’ North says home ownership is still an aspiration for many Australians. But he thinks the number of investors will continue to grow. “Once they get into the property market it creates a domino effect. They buy the next one, the next one, the next one. The long-term demand is supported by investors, supported by the government through tax and supported by the banks.”

“Mario Borg Strategic Finance, advised Pritchard and Envall on their portfolio. Borg said more young people are becoming landlords rather than chasing the dream of home ownership. “The talk around the barbecue is not about property, it’s about property portfolios.”

2 over-leveraged apartments is a portfolio?

Would the mortgage guy “advised” them to take more or less of his product?

I’m looking at buying something now in adelaide. The price of the mortgage will be the same as I pay in rent and I would rather be paying off my mortgage than someone else’s. And at the end of the day I’m buying a house to live in for 10 years at least. And guess what in 10 years it’s going to be worth at least a third more. At the end of the day over the next 30 years the property will be worth a hell of a lot more than I paid for it. We could all wait round for the bubble to pop and keep paying someone else’s mortgage or we can just get on with it. It’s a consumable at the end of the day.

I’ve been cruising Adelaide property over the last two years and my impression is that in late 2014 upper level prices have increased sharply. Northern suburbs is flakey due to the Holden closure. My guess is that if growth was adjusted for manufacturing industry closure, then Adelaide increase would be higher.
Just fiddled with the SAGOV sales numbers at nominal average over 9 years is 51%. Last year to March 3.1% metro. Non metro flat over 5 years. Average metro now $480k. Non metro $275k

Well put. When this thing bursts, I really hope the media are dragged over the coals for their role in it. The Irish media didn’t have the benefit of every single international body (IMF, OECD & BIS) 2 rating agencies (Moody’s & Fitch) the corporate regulator, the CB and Treasury all calling out a bubble. The Australian media does. Yet they continue to print the same crap they’ve printed forever.
At the 2020 inquiry into the bubble how will current Editor of The Australian justify the repeated lies they’ve published on NG. Or Henry Ergas publishing shortage BS – deliberately confusing the asset and consumer market. Or David Potts saying it can’t be a bubble because there hasnt been an explosion in borrowing and Chinese investors pay cash. Do they seriously think Treasury doesn’t know how to model housing (the asset) and doesn’t know what a bubble is. Media are 80% responsible.

Media may be 80% responsible. But then again, this happens all the time. An ostensive example of human idiocy? Perhaps. But it is faulty to conclude that Australia had better warning than, say, the Irish. It is just that everybody in a bubble believes that they are different. Don’t believe me? Ok, let’s see.

The Irish (and the Americans) did have plenty of warning in the lead up to their epic bust in 2007. After all, the Asian financial crisis was less than a decade old back then.

Likewise, the Thais, Malaysians, Indonesians etc., did have plenty of warning in the lead up to the Asian financial crisis in 1998. After all, the Japanese and the Finnish housing bust was less than a decade old back then.

And the list goes on.

Now, in 2015, the Irish (and the American) housing bust is 8 years old. If the Australian housing bubble bursts in the next year or two, the timing will be right on the mark.

“Over the longer term it is much easier to predict that prices will increase. The growth in Australia’s population will ensure this. With the population forecast to grow to 34.4 million by 2036. Equivalent to adding three new Melbourne’s”.

But not adding three new Melbourne’s.

There’ll be 3 families per house before we get this delusional fall in prices.

GenY you need to address the real problem or forget ever owning a house in Australia.

While the argument there may be “no genuine lack of physical housing” might be technically true, practically speaking it is not. Rents may not have seen the astronomical growth of house prices, but that is due to their nature. They are still too high, and vacancy rates are extremely low.

There might be more bedrooms than people, but clearly not all of them are actually available for use.

The trouble is that the shift to low interest rates occurred in many other countries and most did not have anywhere near the surge in house prices or household debt Australia had, implying a heavy speculative element in driving prices higher as well. I have long thought this surge in household debt and relative house prices represents Australia’s Achilles’ heal. Should anything go wrong with the ability of households to service their debt Australia would be at risk. Fortunately it’s hard to see the trigger for this in anything but a small way.

Basically…
– The single guy/girl with a nice professional job earning 80K-90K, want to live near the city. Sure, income wise, not bad, but complains that houses 10 minutes from the CBD are too expensive. I shake my head sometimes. Renting is the best option, if you simply must own a house then you have to move out further. Chances are you’re competing with professional couples with a combine 150-200K income, boomers with 500K+ cash, high income investors who are willing to pay 20% + because of the tax benefits and speculation, foreign students with millionaire parents etc.

You shouldnt expect to be able to compete with people with bigger guns than you, especially if you only have a pistol.

– Young couples who earn “good” income 100-150K, but obviously have future plans for a family… you actually have to half that income realistically. So you’re in the same situation as the single professional above.

My biggest qualms are;
– The wanna-be investors who are in the same situation as the single professional and young couple above. Wanting to buy a nice place, but since they are determined to be an investor with the idea that “all houses only go up in value” will then move towards the outer skirts of the city, even towards the suburbs. One I.P I can understand… but wanting to be Donald Trump of the suburbs, they purchase 3 or 4, using equity from one property to buy the next which is an issue in itself, since that equity is pseudo wealth since its likely created due to other investors driving up the price in that area.

This situation, irks me, because these people are exploiting the negative gear policy and interest-only policy with little regard to the risks that can arise.
They are making houses on those areas even too expensive and forcing the young professional singles and young couples to get locked in on higher mortgages.

The wannabe I.P suburb/fringe city moguls are dragging a lot of innocent people in.

The lack lustre FIRB policies if allowed to continue without reform will eventually lead to foreigners joining the wannabe suburb/fringe city moguls and start buying up new development off the plan housing, now the young professional and the young couple/family people are now competing with 2 types of buyers who are backed by government policies….

Some will probably argue that its simply capitalism and free market working… really?
If so then Australia is hopeless and every young people should start to migrate out.

Labor and the Greens are planning to reform negative gearing, thats a start… the next move is to continue to put pressure on the ATO/FIRB and Government to hammer illegal foreign buyers, you have to punish the local agents and their agencies who have sold out sovereignty for that new BMW in the garage.

If the economy has a chance to expand, encourage corporations to invest in Australians again and create jobs here… they need to MAKE SURE Australians are not spending all their income on HOUSING. You free up more disposable income… which transfers to other industries… which helps circulate money around.. creating jobs, creating productivity gains.
If the budget is in SURPLUS billions of dollars…. negative gearing (on new builds only) might MAKE SENSE… but when the budget is in the red and the government have to compromise industries…. Negative gearing should be on hold…

The country’s future is hopeless until changes are in place…
The current decision makers have vested interest… you have to remove them first and put people with NO vested interest on housing, to allow Australia to expand again…

The sad truth about ALL of this is that GenY are irrelevant to both the cause and potential solutions to the problems arising from nigh-on an entire generation being priced out of affordable home-ownership. Rather than considering a boycott of GenY on house purchasing (and whom would that inconvenience?), or renters negotiating for lower rents (would do no good), a complete stop payments campaign by renters to influence the political powers that be (i.e. Alan Jones) $might$ have some effect on introducing policies that put an end to a society hell-bent on funding speculation over investment; e.g. Janet’s reference to NZ budget changes requiring an IRD (TFN) number. Until change like that happens here in Oz we are all pissing into the wind, as what most people expecting the housing bubble to pop fail to understand is how much superannuation and O/S money there still is that can be thrown at Australian RE. This could go on for another decade if left unchecked. Until the owners of that money decide, or are forced to decide via legislation, that $somewhere else$ is a better investment than this country, GenY is and will remain screwed. If only more of them had voted… that was something they could have done that might have helped. Guess we’ll never know.

I tend to agree. With both sides of government prepared to sell off the whole country rather than let the bubble pop, what hope do we have?

A bubble can still pop, and it doesn’t mean that everyone is affected. There are many, many people who bought when properties were a fraction of what they are worth now, and could easily ride through a fall of 30%, 40% or 50%. Or more. If prices dropped, they might be inclined to use their super to load up on more real estate.

But it’s the amount of foreign buying that really worries me. It’s an unknown quantity, but whatever it is, it’s huge. And while there’s going to be a small fee slapped on foreign purchases, it’s certainly not going to make it any harder for them to pay hundreds of thousands over reserve for their piece (pieces) of the pie. Even with the ATO on the hunt for illegal purchasers, there is absolutely no discussion on actually limiting foreign investment.

And remember too, despite all the recent newspaper articles about the bubble, there has been absolutely no acknowledgement by the government yet of any such thing.

Flyingfox you have used a graph demonstrating affordability in other oecd countries compared to australian, however I’m from London and I can tell you that london is a lot less affordable than Sydney. But then parts of northern England are more affordable than Hobart so these general graphs don’t prove much. You have to remember they are averages.

A lot of people earn $300,000+ in London so that screws the stats. At the end of the day it’s case by case.

15 years ago my dad said to me… Son when I was 21 I had my own house. And that was the average age for a first home buyer then in England. Now it’s 39!

In australian I think it’s lait 20’s at the moment. In 15 years it will be 35 – 40. I think that Sydney is in a bubble and prices will drop by 30% but they will be up 100% in 15 or so years.

you have used a graph demonstrating affordability in other oecd countries compared to australian, however I’m from London and I can tell you that london is a lot less affordable than Sydney.

All data has a point. There is a generally observed trend everywhere that affordability decreases with increases city size. Except that all cities with price to income greater than 5 are in Australia. Not only is sydney expensive, so is Hobart. That’s the point of the graph and it shows exactly that.

A lot of people earn $300,000+ in London so that screws the stats. At the end of the day it’s case by case.

And your point being? London is the fin capital of Europe, why do you expect it to be cheaper than Sydney? A few year back, I considered moving into finance given my skill set. I could get ~100-250 job opening in London and NY, about 10-20 in Sydney and about 2-5 in Melbourne.

I think that Sydney is in a bubble and prices will drop by 30% but they will be up 100% in 15 or so years.

Then you should no doubt be aware that Sydney prices went nowhere between 2003 and 2009….7 Years…literally…not inflation adjusted.

Edit: You should do some serious research as to why prices went up when and how much they did. It’s not a law of nature mate. It was one time structural changes.

Point being that if you have a higher spread of wages the averages can appear the same than if you have every one earning the same. Therefore housing can be very affordable or very unaffordable but an average will not demonstrate this.
Look housing is unaffordable I don’t disagree. But my experience its going one way and the people that don’t get on board get left behind.

I lived in the South East of England. Wage was $60k and house was $600,000. I’ve come to Aus 5 years ago and my wage is 80k + car and a house is $500,000. You tell me where is more affordable? I use to work 6-7 days a week to pay rent and bills. You can look at your stats but unless you have experienced living in another country you cannot tell me australia is more expensive on averages

There are various statistical ways of getting an accurate picture. For the most part they are pretty accurate (if you use medians etc). You happen to live in Adelaide which is arguably a more affordable part of Oz. Also one’s situation can be very different. I get paid very well in my position relative to what I would in London. My wife would probably get paid better. But overall, we would be worse off. If I moved to Texas or Adelaide, we could buy a house outright…

But my experience its going one way and the people that don’t get on board get left behind.
Again, see why prices went up and if they can continue to go up.

BTW, I say this thing not because I can’t afford a house, I’m just passionate about it.

I don’t happen to live in adelaide. I was born in East London I didn’t take a wrong turn and end up here it was a balanced decision. My wife is Australian and I love you guys but fuck me you love to play the hard done by card.

Property is very over priced just count yourself lucky you don’t live in Hong Kong or London. Texas is a hole of a place along with most of the States. This is and will continue to be the lucky country just don’t borrow more than you can afford to pay back on one wage.

Property is very over priced just count yourself lucky you don’t live in Hong Kong or London.

Why is the comparison always against London, NY, Singapore and HK? We have no comparable cities. None! For those four cities there are tens of more comparable cities who don’t have stupidly expensive housing.

Sydney is not London or NY or HK or Sing. Get over it! Melbourne shouldn’t even be named in the same paragraph. I’m an immigrant too, I just don’t drink the koolaid.

When the average Australian income in Sydney approaches 200K+ then you might have an argument about house prices going up to 1.5+ million.

The only way house prices in Sydney and Melbourne will approach 1.5 million + as median in the future is if the Government will open the water tap full on foreign investment and increase incentives.

Even builders locally who over bid on houses to tear them down will have obstacles preventing them from mass buying old houses on big blocks.

I would love to hear reasons how salaries in Sydney will go up similar to that of executives of big corporations in London, New York, Tokyo etc. Those countries have either head quarters or country of origin of the global corporations. Considering Australia is losing a lot of jobs in the next 2-3 years and cut-backs are expected… its unlikely….
Although market spruiking real state agents can earn 200-300K+ commissions after selling several million dollar houses to the Chinese.

Oh and the other problem is that lending criteria in the uk is so tight now that unless you have a flawless credit rating. 20% minimum deposit and a bloody good job no bank will touch you. So all my mates left in the UK are up shit creek without a paddle! Even tho they are pretty successful no one can save £60,000 deposit. But the guys that got on the ladder pre GFC are doing ….. Ok. At least they are not at home with mum and dad

They’re the slums of the future, but not to be confused with the rest of the housing market.
Windowless bedrooms is about the tackiest idea that anyone could have come up with. How architects/developers can get away with stupid designs like these is beyond me.

We will have a glut of inner city apartments, and Matthew Guy, the previous Planning Minister who wanted to Manhattanise Melbourne is to blame for allowing every single building proposal that came across his desk to go ahead. He spoiled parts of Melbourne forever.

Wow so many comments generally supportive of an Economic Reset yet when I read between the lines, I detect an ongoing and consistent meme….When housing prices crash I’ll be there all cashed up and ready to step into the abyss….hmm what’s wrong with this logic?
How will someone else’s unproductive RE investment suddenly become my”productive” RE investment?…the cognitive dissonance is about to make my tiny brain explode, All this would do is destroy our capital base and destroy our international credit worthiness, hardly the first steps in any V shaped rebirth of a “productive” economy. Nope, when it happens it’ll be a three or more stage melt with successive generations of RE investors stepping into the abyss only to have their “cheap RE” investment turn to shit, in investing jargon it’s a classic value trap, For those unfamiliar with Value traps look at a company called Eastman Kodak, they made photographic film and the business was a veritable gold mine with unbelievable free cash flow ratios yet they went bankrupt unbelievably quickly once digital cameras achieved reasonable results. IMHO Aussie RE is just such a value trap and unfortunately without the political will to put an end to this insanity it’ll remain a value trap.
I’ll start to believe an Australian economic rebirth is possible when the dominant meme of sites like MB changes from “how do I buy Syd/Melb Re cheaply after the crash?” to “Which investment of these globally productive investments makes the most sense?” Until that day comes we’re @#$%ed!

@ChinaBob – no – someone elses unproductive investment property (or anti China bolt hole) becomes someones HOUSE. Where they can live at a reasonable cost while then using their disposable income to invest in productive capacity

Insightful comment, first let me own a house, then I’ll do the hard yards involved with understanding how I leverage Australia’s endowments to crate global productive value. Hard to argue with the simplicity of that logic, but let me have a shot. Isn’t it also possible to simply rent a house, accept the stupidity of the housing market and get on with the task of developing a productive Australian investment?
Of course I can see the stupidity inherent in my reply….because if I dont buy now how will I ever be able to afford to buy? you know RE is the only true investment! ‘course that would be exactly the meme I talked about that’ll see 3 or more rounds of “investors” ruined before this bubble runs its course.

I’ll start to believe an Australian economic rebirth is possible when the dominant meme of sites like MB changes from “how do I buy Syd/Melb Re cheaply after the crash?” to “Which investment of these globally productive investments makes the most sense?” Until that day comes we’re @#$%ed!

+1. Some of us already do…

Edit: For many it’s an “investment” because they can get a loan or tax break. Wouldn’t happen otherwise.

We are not interested in houses for investments, we simply want one to live in thats our own at a reasonable price. This would make our capital productive in its own right. And yes we do have a decent stash of cash awaiting this event, it will probably have a few minor recoveries on the way to the bottom as pent up demand jumps in, but only if the banks agree to lend, which they may not do so.

We would also be extremely happy if substantial amount of people could not afford to be a landlord and compete against those who seek to buy a family home, negative gearing and someone else paying most your rent certainly gives you a substantial edge.

we simply want one (house) to live in thats our own at a reasonable price. This would make our capital productive in its own right.
Wrong…Capital is productive, in a global sense, when the deployment of this capital generates a positive net free cash flow.
Until we start the national discussion about “Australian productive after the mining boom” we’re just playing the same old game of musical chairs, and we all know what happens in this game each time the music stops.

I noticed this article about labour relations problems at a large Perth based engineering / labor contractor Monadelphoushttp://www.gladstoneobserver.com.au/news/call-arms-industry-workers-rio-sites/2670668/
read the comments of the workers probably mainly FIFO’sWe need to stand up and be counted or bend over and be mounted,”
Talk about clueless…. reminds me of the Shrek theme ….with her finger and her thumb in the shape of an L on her forehead.

Mona is reducing rates because Rio is reducing rates, Rio is reducing rates because China is paying less and less and less ….welcome to the flip side of the mining boom.

BTW does anyone know why Mona is in a trading halt? can’t be just this stupid industrial action.

agree CB that the general comments aren’t very macro. figure they just want an affordable house.
the other day MB had a post where the Kouk and others agreed there was a bubble and everyone went around at MB patting themselves on the back. And now this thread.
well, I agree houses are overpriced (and all the ramifications of that) but it isn’t a bubble til it bursts and the fire-politico set will doing everything to keep it afloat. this could go on for a while yet in Syd/Melb
meanwhile back, at ground zero, listings are flooding Perth, with asking prices not scene since the GFC – nothing like not being able to service the mortgage to bring on a price correction.

“Nope, when it happens it’ll be a three or more stage melt with successive generations of RE investors stepping into the abyss only to have their “cheap RE” investment turn to shit, “

You’re ignoring the psychological impact a severe correction will have on people. Did people in Spain rush to buy real estate after their crash? The religious belief we have in this country of “property can only go up” will be getting the history lesson it deserves and the followers of that religion will start to question their faith.

Good point but who said this was the nadir of Spanish house prices. Chances are they’ll ratchet down from here because their economic crash is creating an entire generation of unemployed/unemployable, It’s a fact of life that without meaningful employment opportunities in their 20’s most people will never realize their true potential, they’ll carry to their grave the scars of youth unemployment. That’s not a fate I’d wish on anyone, even my enemies diverse a better life than that.

My point is that house prices are a distraction, Australia’s most important post mining boom question is: What’s Next?
What are Australia’s industries of the future?
What Tax, Fiscal, Education and other policies are needed to support these growth industries?

Maybe its Tertiary Education and Tourism, but frankly I doubt it. Maybe cashed up Chinese will start dumping their excess cash on the door steps of Australia’s Financial managers, but I SERIOUSLY doubt it. Maybe Mike Smith will lead our banks to their rightful place as the dominant force in Asian banking / finance….maybe what do I know

My point is simple: As a country we haven’t even began the “what next” discussion and apparently we can’t begin until this stupid issue of housing affordability is fixed. Talk about @#$%ed

Spot on CB – people still don’t ‘get it’ – the place needs to consider what the hell it is going to do when borrowing money overseas to swap unproductive investments with each other is finished as a business model.

I just shake my head every time I hear another politician calling for more ‘training and apprenticeships’.

A lot of so called ‘advanced’ economies set their sights a little higher for their industry and construction is generally performed by migrant workers from the subcontinent.

Thanks 5*8 and Gunna, it’s good to know I’m not the only one that sees the “what’s next” question as the solution to Housing affordability. It’s the solution because, properly implemented, it provides true Investment capital with a path to riches, indirectly that’ll put an end to today’s RE speculation pressure and return housing to it’s true role of shelter…but it’s a discussion we cant have till we fix a problem (housing) that we lack the political will to even acknowledge. That’s a catch22 if ever their was one.
Gunna, sorry I missed your earlier comment

“it’s good to know I’m not the only one that sees the “what’s next” question as the solution to Housing affordability.”

The business model of this country that people believed has served them over the years (basically a free lunch business model) is no longer viable and it’s showing its cracks. What’s next is not going to be determined by the same people that created and supported this business model and it won’t be determined by having an intellectual discussion. It will come only after people learn (unfortunately, the hard way) that in reality there’s no such thing as a free lunch.

Housing affordability does look to be a secondary symptom of a deep and wide malaise. Unfortunately, as the issue is virtually blocking the airway, fixing that issue may need t come before anything else.

Housing affordability does look to be a secondary symptom of a deep and wide malaise. Unfortunately, as the issue is virtually blocking the airway, fixing that issue may need t come before anything else.

I should think once CBs questions below are answered we’ll have taxation/policy settings that don’t promote property speculation so I agree.

What are Australia’s industries of the future?
What Tax, Fiscal, Education and other policies are needed to support these growth industries?

I dont think in the future that RE will be the way to make money, it will be from a small business. Those of us who survive this will be in a strong position to load up with clients. This is our plan. Buy a family home for as little as possible that suits our purpose, keep over heads low, work our butts of to develop the business (I own an IT business that does SME and education networks from 1-1500 users)

“Buy a family home for as little as possible that suits our purpose, keep over heads low, work our butts of”

This. I want housing to be affordable, not because I’m a cheapskate, nor because I want something without working hard for it.

I work hard. I don’t want to work hard just scrape by to barely put a roof over my family’s head. I want to work hard to build productive investments that will support me and my family for years into the future.

Every cent going into the house is a cent that can’t be used more productively.

Born and raised there, I left Adelaide in search of a better career with more opportunities after spending the first 4 frustrating years of my career watching my income fail to keep up with house price increases, while working for some pretty crap companies.

Yeah yeah, Adelaide, it’s so “affordable” compared to Sydney, right right whatever, if you manage to find a job that doesn’t destroy your soul, and then don’t lose it for 25 years. Or if you’re coming from a bigger city and have cashed in.

I figured, if I’m not going to have a job that’s going to be stable enough or paying well enough to get a house in Adelaide, then I’d rather be in the same situation of not being able to afford a home in a better city with a more reliable job market, with better, more interesting career opportunities for my skill-set.

I landed in London in the middle of the last decade. Met my girl over here, another Aussie. Now we own an affordable house, in the outer suburbs with good rail connections into central London, have a job at a highly innovative, world-leading business.

We don’t really want to come back, and the girl is even more adamant than me. The only thing that tugs at me from afar is family, my parents are getting older and older, my nephews and nieces are growing up so fast. That’s why I keep an eye on things back in Australia, and I love this site for that.

But, I know Australia couldn’t give two shits about us, really, but if it ever wants to attract us back, well, there’s no way I’m going to pay over-the-odds (in local income terms) for some mediocre house in Adelaide, in order to have the pleasure to suffer from the insecurity and lack of depth in the local job market again. I’d be giving up our home in greater London, where I can access one of the best job markets in the world, while saving and investing for the future as well as paying the mortgage.

Adelaide would need to be much cheaper, in local salary terms, or offer better job opportunities than there were a decade ago.

For those unfamiliar with Value traps look at a company called Eastman Kodak, they made photographic film and the business was a veritable gold mine with unbelievable free cash flow ratios yet they went bankrupt unbelievably quickly once digital cameras achieved reasonable results.
Indeed – the great irony is they invented the digital camera.

thanks for that. I tend not to look at any MSM so interesting to see in that video the reporter sounding very nervous for PIs. Also it was -9% in the CBD, not inner suburbs, so mostly apartments I guess. The comments on that post are pretty out there tho – some still drinking Kool-Aid.
early days on the data/stats I reckon as some distortions due to low sales volumes, but anecdotally it is on a slide.

Yep, that lie is the standard propaganda that has worked for years. It’s only now that people are starting to wake up to the fact that perhaps it isn’t necessarily true. There have been several articles recently with the usual lie and cover-up about how neg gearing will push up rents, but they (the articles) usually have the opposing view as well from the likes of Saul Eslake etc. who remember the 80s quite differently.

“Maybe Lorax or drsmithy could walk us through why the Greens voted against land releases.”

The NIMBY factor is a far more powerful force than the Greens. We need to build housing where people want to live and where they work (If we want a happy and productive work force). Besides, there is plenty of land being released in parts of outer Melbourne, at least there is where I am, shame nobody wants to spend money on infrastructure to support the growth in population out here!

Plus it is Labor and Liberals that are increasing the population to prop up their broken economic model. And it’s their petty political fights and mismanagement that has demonised public debt and made borrowing for infrastructure political poison. This whole asset recycling scheme the Liberals came up with to sidestep the hysteria they’ve created around debt will only deliver so much.

“Labor and Greens are destroying Australia by being completely untrusted to be voted for.”

Ok, there is some truth to that!

“We need 3 new parties, or kiss your country goodbye GenY.”

But those pulling the political strings will still be there playing their power games. They will still be in the media pushing their economic and social agenda and causing grief for new parties and independents. And we’ll still have a broken economic model that requires population growth and asset bubbles to prop it up.

I don’t know how, but we need a more savvy and less selfish voter. Whip the voter into shape (and away from housing porn) and you’ll create demand for new political parties and true independents.

Couldn’t agree more. IMO what we need are candidates with conviction to articulate to the electorate what’s being done to their country along with clear vision of alternatives. People like Dick Smith.

I think there’s a huge number of greedy selfish voters, but I also think there’s ill informed voters, uninterested voters and dumb voters. Thenb there’s the 70% of voters that vote for one or the other because there’s no other options they think. Even educating the electorate how to successfully vote against the two major parties would make a huge difference. Given the information and options, I think good people could wipe this parliament out. The longer it goes though the harder it becomes. Wait until Australia’s 40 million. New migrants will vote to open our borders to China.

The very best thing that could happen for GenY is Big Australia Shorten is pressured to resign “if” it proves he’s been corrupt.

Labor can then come up with a sustainable population policy.

Of course they will not be let anywhere near power unless the clowns come up with a credible border policy Shorten or no Shorten. Richard Marles has pretty much said Labor will reopen our borders. Labor have zero chance of forming government, leaving LNP to sell the rest of Australia at GenY’s expense.

Labor and Greens are destroying Australia by being completely untrusted to be voted for.

” ”We look at the housing market like a food chain. The first-time homebuyers are really the plankton. And if you don’t have plankton in the ocean, you’re going to eventually starve out even the big whales and the sharks. You need that first time homebuyer to buy that home so the next person can move out to buy their own home.”

And there was plenty of this plankton, namely millennials and about 250,000 immigrants per year who’re buying their first property, he said.

“There is strong demand in this country and there will always be,” Levings said. “Why? Simply because of our immigration policy. We bring in first-time buyer pipelines through our immigration policy. They are great future first-time homebuyers that become plankton.””

Get what we deserve? We didn’t have much of a choice, and nobody was asked whether we wanted a $5M visa or a $10M visa. I think, if asked, there would be an increasing amount of people who would say, “No visa at any price until Australians can afford to buy their own home.”

We also weren’t asked whether we wanted a Big Australia. We’ve had it rammed down our throats that it’s good for us, good for the economy and don’t dare question it or you’ll be called a racist.

And we also haven’t been asked whether we want foreign investors buying up the country.

The government does what it wants. They do not do what is best for the country. They do what’s best for themselves, and damn the consequences.

I’m the only person I’ve read mention it since it happened. If 15 million of us did that, they’d have zero choice but to squash it.

We are collectively ambivalent, lazy, stupid, trusting, unquestioning and complacent.

That’s what I meant by we will get what we deserve. I hate watching it. Most of Australia has no idea what’s coming.

All generations have been greedy and exploited their environment, the difference is, now we’re running out of stuff. It’s going to happen all at once and with a projected population of (pick a number) 35 – 50 million, Australia will be poverty stricken. We have been spoilt fucking rotten and act as such and will get what we deserve.

“Ever question why there is a big jump in immigration in 2006?” Why is that?

Much of Australia will be poverty stricken. But many people have also made a fortune on the back of this property bubble. And the bigger the bubble grows, their wealth will grow too. If the bubble bursts, of course a lot of people will suffer, both rich and poor. And a lot of people will benefit, too.

I don’t know that it’s the fault of the general public though. I have said on other occasions I’m surprised there isn’t marching in the streets due to unaffordable housing. I wish there was. And then maybe, just maybe we’d see some action on the part of the government. I am glad there has been a lot in the news over the past couple of weeks.

Tony and Joe have to know we’re in a bubble – I’ve said this before. Of course they deny it because the minute they admit it, then they’ll scare people, and they’ll also be forced to do something. It’s much easier to do nothing, and in any case, whether the bubble pops or not, they are not going to be affected all that much. Even if their property portfolios go down in price, they will still be on very good incomes for the rest of their lives and can easily afford to buy property in any environment.

So the pressure really needs to be put on them to do something now. Like abolishing or grandfathering or modifying negative gearing. But not without also doing something about foreign investing, both legal and illegal. And at the same time, do something about the immigration rate. They have to come at it with a multi-pronged attack. I’d hate to see negative gearing go, but then see foreigners swoop on everything in sight. Or increase the immigration rate.

But blaming the population – or ourselves – isn’t really fair. It’s not our job to make the rules. We can only comment. If politicians want to be leaders, they should be strongly encouraged to do the right thing and lead properly for the good of the country.

“But blaming the population – or ourselves – isn’t really fair. It’s not our job to make the rules. We can only comment. If politicians want to be leaders, they should be strongly encouraged to do the right thing and lead properly for the good of the country”

I don’t agree. The saying we get what we deserve is real. We should be marching in the street as you say. If everyone were as arrogant and aggressive as me, our politicians would all be in jail until we got squeaky clean ones that did what was right for the entire country. If everyone gave it ten minutes thought they’d realise voting for any of the incumbent FW’s will lead to more of the same. Australia needs a reset. A hero to stand up and demand to be heard and tell the story of what’s happening to us.

I’d love to see our politicians pay for what they’ve done. We can start by telling anyone that will listen (and I do) how destructive Howard was. He’s a pinup boy and should instead be condemned. Then there’s Hawke, Rudd, Gillard, Rudd, Abbott, Hockey, Plibersek etal. Condemn them all. They have failed Australia.

“The government does what it wants. They do not do what is best for the country. They do what’s best for themselves, and damn the consequences.”

Actually, when it comes to a big Australia, and other core economic issues, the government largely does want the business community wants. Ironically politicians probably believe it is good for the country, but then not many of them challenge the whole neo-classical dogma.

@RobW. Exactly. Big business runs our politicians. Politicians will never negatively be affected by a growing population. They have the money and connections. It’s up to us as voters in a democracy to show them the door when they fail us.

Without question, this is our fault. We fail to vote them out.

Months ago I said again and again. Vote below the line leaving the incumbent last. I don’t think I even got one reply.

Tried to tell you many times mate but you wouldn’t stop ranting. Q2 06, ABS changed the way NOM was calculated from the 12/12 to the 12/16 rule. Suddenly holiday makers, students, migrant workers etc etc get counted in NOM. No right or wrong but comparing pre 06 to post 06 data is not statistically correct.

This is freak’n hilarious!!! I’m sure I read this same post years ago and read all the exact same comments too yet anyone who bought a house back then and sold it now would have made their riches over! This is LOLOLOLOLOLOLOLOLOLOLOLOL!

PS!!! There is no housing bubble just smart investors getting rich over the idiot whingers who don’t have the guts to go hard and load up to the max with debt and then some!!! (Those types are the real winners here)

“There is no housing bubble just smart investors getting rich over the idiot whingers who don’t have the guts to go hard and load up to the max with debt and then some!!! (Those types are the real winners here)!!!”

LOL! There is almost always a kernel of messed up truth in your satire! That’s probably what makes it so entertaining.

Unfortunately the current monetary settings (locally and globally) do reward pretty extreme risk taking behaviour over prudence and conservatism. I guess that’s what happens when the global economy is fundamentally broken.

Strange not one comment on stagnate wages and lowering of credit underwriting being foundational to events even when there is decades of data which highly correlates. Naww… must be supply, lack of competition, productivity, to much paper work, HPM, et al.

Skippy…. know wonder so many were blindsided prior to the GFC, yet now pontificate on it.

Largest transfer of wealth in modernity followed by ATO door knocking, only to be told we gave at the office.

APRA might forestall an new wave of exuberance which culminated in the aforementioned result, of the last bout of fried dopamine receptors, necessitating a massive increase in product, or they might have a sad.

Well i reckon just about everyone down to the butchers granny knows CDO’s are the key to endless bonuses – the pressure to channel some lightning into these dormant monsters is coming from just about everywhere good braces are sold…

Oh MB thank you so much! This is called freedom of speech. This article accurately discusses the incorrect thinking and argues of “Properties always go up” crap! This statement is only as good as saying that “the planet earth is flat” back in time! The fact that spruikers are frightened to the extend where they want to prove the logic wrong is a funny action in its own. LOL.
The times where investors so proudly and at times quite loudly brag about their houses are truly over! We are first hand seeing how the tides are turning. We just loved guys. It is beautiful. 🙂

I think you’re jumping the gun there, Prince. The bubble hasn’t burst yet, and tides haven’t turned yet either. We are, on the other hand, seeing more articles in the MSM about the housing bubble, and the online papers are allowing more comments than usual as well. There is a lot of angry people out there, but the politicians still have their fingers in their ears and are not listening.

The decision maker obviously have this “import” rich foreigners in, let them make the boomers rich… push the a big chunk of Gen X and Gen Y (and younger) to work “service” jobs to the rich. Some genius (sarcasm) within the decision makers think no one will notice, plus expect Australia to thrive simply as a “residency” for the foreign elite as well as a vacation spot. Discarding the experience, knowledge and skills of citizens to the side and pushing Australia’s role in the global economy as a “relaxation” spot for the cashed up people.

As long as the fear of default rates going exponential exists you’ll probably won’t see much of a rise in rates, in America its down about 50% from a high of 30ish%. Plus I think there is still a significant exposure to vintage sub prime et al triggers out there.

“Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

The buyback wave has gotten so big, in fact, that even shareholders—the presumed beneficiaries of all this corporate largesse—are getting worried. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Laurence Fink, the chairman and CEO of BlackRock, the world’s largest asset manager, wrote in an open letter to corporate America in March. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.” – snip

Oh look here’s that little chart I’ve used before, like a few years ago and since

When Productivity and Wages Parted Ways

From 1948 to the mid-1970s, increases in productivity and wages went hand in hand. Then a gap opened between the two.